CA Foundation · Business Economics · Money Market
Reserve money in an economy is ₹8,00,000 crore and the money multiplier is 5. The RBI then conducts an open market purchase of government securities worth ₹20,000 crore from banks, which raises reserve money by exactly that amount, with the multiplier unchanged. By how much does the money supply increase?
Money supply rises by ₹1,00,000 crore. With the multiplier unchanged at 5, the increase in money supply equals the multiplier times the ₹20,000 crore rise in reserve money, so 5 × 20,000 gives ₹1,00,000 crore.
- A₹20,000 crore
- B₹80,000 crore
- C₹1,00,000 croreCorrect
- D₹4,20,000 crore
Explanation
Change in money supply = multiplier × change in reserve money = 5 × 20,000 = ₹1,00,000 crore. Option B subtracts one from the multiplier (4 × 20,000), which is wrong, and option A ignores the multiplier altogether.
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