Question

Suppose in an economy, primary deposits are ₹ 500, if the Reserve Ratio is 25\%. Estimate the total deposits created and the total lending by the banking system.

Hint:

Use Credit Multiplier = 1 / CRR for estimating total credit creation in the economy.

Answer 1

Formula: \[ \text{Credit Multiplier (CM)} = \frac{1}{\text{CRR}} = \frac{1}{0.25} = 4 \] Total Deposits Created: \[ = \text{Primary Deposits} \times \text{CM} = 500 \times 4 = ₹ 2,000 \] Total Lending: \[ = \text{Total Deposits Created} - \text{Primary Deposits} = 2,000 - 500 = ₹ 1,500 \] Conclusion: Total deposits generated amount to ₹ 2,000 crore, and total lending capacity is ₹ 1,500 crore.