Question

A bank receives reserves of ₹100. If the CRR is 20%, what is the maximum total deposit that can be created in the system?

• A. ₹400
• B. ₹100
• C. ₹500
• D. ₹200

Hint:

The money multiplier is the inverse of the CRR. A higher CRR reduces the money multiplier and limits the total deposit creation in the banking system.

Answer 1

The Correct Option is C

The money multiplier dictates the maximum total deposit achievable within the banking system. This multiplier is derived from the inverse of the Cash Reserve Ratio (CRR).
The calculation for the money multiplier is as follows: \[\text{Money Multiplier} = \frac{1}{\text{CRR}} = \frac{1}{0.20} = 5\]Consequently, the maximum total deposit is calculated as: \[\text{Maximum Total Deposit} = \text{Initial Reserve} \times \text{Money Multiplier} = ₹100 \times 5 = ₹500\]Therefore, the banking system can generate a maximum deposit of ₹500.