Question

If legal reseve ratio is 0.2 and new deposits are 1000,explain the process of money creation by commercial bank

Answer 1

Answer:

Legal Reserve Ratio is the requirement of cash reserves which a commercial bank is obligated to maintain.

Explanation:

In the present case, the Reserve requirement is 0.2 and deposits are Rs.1000.

Thus mathematically, Cash Reserve = Reserve requirement x Bank deposits

Hence, the quantum of money to be maintained by the commercial bank is Rs.200 (0.2x1000).

The Legal Reserve Ratio is composed of two components such as Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio(SLR). These ratios are fixed by the Reserve Bank of India(RBI).

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