Question

If the Legal Reserve Ratio (\(LRR\)) is 20%, the Money Multiplier will be:

• A. 2
• B. 5
• C. 10
• D. 20

Hint:

Higher the LRR, lower the Money Multiplier and lower the credit creation. The Central Bank uses LRR (CRR + SLR) as a tool to control money supply in the economy.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The money multiplier is the process by which commercial banks create credit/money. It is determined by the reserve requirement set by the central bank.
Step 2: Key Formula or Approach:
The formula for the Money Multiplier is:
\[ \text{Money Multiplier} = \frac{1}{LRR} \] Step 3: Detailed Explanation:
Given: \(LRR = 20% = 0.20\)
Substituting the value:
\[ \text{Money Multiplier} = \frac{1}{0.20} \]
\[ \text{Money Multiplier} = \frac{100}{20} \]
\[ \text{Money Multiplier} = 5 \]
Step 4: Final Answer:
The money multiplier value is 5.