Question

(b) Assume that the required reserve ratio is 25 percent. The desired currency to deposit ratio and the
desired excess reserve ratio are both zero. If there is an open market purchase of Rs. 250000/-, What
will happen to the following?
Total deposits of the banking system
Loans
Total reserve​

Answer 1

Answer:

The Money Multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply.

For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million. The money multiplier is 10.

The money multiplier is a key element of the fractional banking system.

There is an initial increase in bank deposits (monetary base)

The bank holds a fraction of this deposit in reserves and then lends out the rest.

This bank loan will, in turn, be re-deposited in banks allowing a further increase in bank lending and a further increase in the money supply.