Question

a. Money multiplier is the process by which the commercial banks

create credit, based upon the reserve ratio and initial deposits.

b. Reserve deposit ratio is the minimum reserves which a commercial

bank must maintain as per the instructions of the Central Bank.

Credit Creation = 1



Thus, credit creation is inversely related to the reserve deposit

ratio.

For Example: Suppose the Reserve Ratio is 0.2 and initial deposit

is ₹ 1000 crores.

Total Credit Created = 1



x initial deposits

=

1

0.2

x 1000

= ₹ 5,000 crores.

Now, suppose reserve ratio is increased to 0.5

Total Credit Created = 1



x initial deposits

=

1

0.5

x 1000

= ₹ 2,000 crores.

Thus, on the basis of the above illustration we can say that there exists an

inverse relation between reserve and credit creation.​

Answer 1

Answer:

The money multiplier tells us by how many times a loan will be “multiplied” through the process of lending out excess reserves, which are deposited in banks as demand deposits. Thus, the money multiplier is the ratio of the change in money supply to the initial change in bank reserves.

Answer 2

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