Question

If LRR is 25% and initial deposit is Rs. 25,000, what would be the money creation and
money multiplier?

Answer 1

Answer:

500 crores Total deposit = Initial deposit x money multiplier = 500 x 10 = 5000 crores. 2. If total deposits created by commercial banks are Rs. 12000, LRR is 25% calculate initial deposit.

Answer 2

The money creation is Rs. 100,000 and money multiplier is 4.

Legal reserve ratio, LRR is 25% and initial deposit is Rs. 25000.

We have to find the money creation and money multiplier.

First we should find the money multiplier.

Money multiplier : It is the inverse of Legal reserve ratio.

i.e., Money multiplier = 1/LRR

Here, LRR = 25% = 25/100 = 0.25

∴ money multiplier = 1/0.25 = 4

Money creation : It is the amount which can be created by a bank by the amount of its excess reserve.

i.e., Money creation = money multiplier × initial deposit.

= 4 × 25000

= 100000

Therefore the money creation is Rs. 100,000 and money multiplier is 4.

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