CA Foundation · Business Economics · Money Market
The RBI sells government securities worth ₹5,000 crore to banks in an open market operation. Banks pay by drawing down their reserve balances with the RBI. The required reserve ratio is 10% and banks hold no excess reserves, so the simple deposit multiplier applies. Assuming banks were exactly meeting requirements before the sale, what is the maximum fall in deposits (money supply) in the system?
Deposits can fall by a maximum of ₹50,000 crore. The sale drains ₹5,000 crore of reserves, and with a 10% reserve ratio the multiplier is 10, so contraction is 5,000 x 10. Multiplying by 0.10 instead would wrongly give ₹500 crore.
- A₹500 crore
- B₹5,000 crore
- C₹45,000 crore
- D₹50,000 croreCorrect
Explanation
Reserves fall by ₹5,000 crore. Multiplier = 1/0.10 = 10. Maximum fall in deposits = 5,000 x 10 = ₹50,000 crore. Check: 10% of 50,000 = 5,000, matching the reserve loss. ₹500 crore wrongly multiplies by the reserve ratio instead of dividing.
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