If the reserve ratio is 20% and primary deposits is Rs 100 what is the value of deposit multiplier and total lending by the banking system
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The Cash Reserves Ratio (CRR) is the percentage of commercial banks' total deposits that they must retain as cash reserves with the central bank.
Step-by-step-explanation:
- The central bank sets the ratio, which is adjusted from time to time to control the amount of money in the economy depending on whether inflation or deflation is present.
- (primary deposit / total deposit) x 100 Equals cash reserve ratio.
= (2,500 / 20,000) x 100
= 12.5 %
- Multiplier refers to the number of times the commercial banks multiply the primary deposit in the credit creation process in order to create total deposits.
Multiplier = 1/ Cash reserve ratio
= 100 / 12.5
= 8 times
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