Question

Hi guys answer this ......✌️
The value of credit multiplier will be high when _____
a)legal reserve ration is high
b)legal reserve ration is low
c)legal reserve ration is zero
d)legal reserve ration is infinity

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Answer 1

Answer:

legal reserve ration is infinity

Answer 2

The value of the credit multiplier will be high when the legal reserve ratio is low. (Option b)

• The credit multiplier refers to the total deposit made by the banking system.
• This deposit will be in multiples of the initial deposit.
• For example, if the initial deposit is Rs.500 and a total deposit of  Rs.2500 is made by the entire commercial bank, then the resulting credit multiplier will be 5 (Rs 2500/Rs 500).
• The legal reserve ratio (LRR) is the mandatory fraction of minimum deposits that every bank should maintain.
• The central bank decides the LRR.
• The credit multiplier and legal reserve ratio are inversely related.
• Credit multiplier = 1/LRR and this means when the value of the credit multiplier is high, the legal reserve ratio is low.