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Given a cash reserve ratio of 50 per cent and reserves of Rs 100, what is the money multiplier?

Solution

✅ Correct Option: 2

Option 1: 5 -> Incorrect calculation of the money multiplier.

Option 2: 2 -> Correct application of the money multiplier formula (1/CRR).

Option 3: 20 -> Incorrectly derived value.

Option 4: 200 -> This would be the result if reserves were multiplied by an incorrect multiplier.


Hence, Option 2: 2 -> The money multiplier is calculated as 1 divided by the cash reserve ratio. With a CRR of 50% (or 0.50), the money multiplier = 1/0.50 = 2. This means that for every rupee of reserves, the banking system can create 2 rupees of money supply. The reserves amount (Rs 100) is not needed for calculating the multiplier itself. -> correct

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