How much total credit creation can bank creates with Cash Reserve Rato of 20% when bank's reserves are Rs. 1000.
How much total credit creation can bank creates with Cash Reserve Rato of 20% when bank's reserves are Rs. 1000.
Solution
Option 1 -> Using money multiplier formula: 1/CRR = 1/0.20 = 5; Total credit = 1000 × 5 = 5000.
Option 2 -> This would require a CRR of 10%, not 20%.
Option 3 -> This is less than what can be created with the given reserves.
Option 4 -> This would require a CRR of 25%, not 20%.
Hence, Option 1: 5000 -> The money multiplier formula is 1/CRR. With a Cash Reserve Ratio of 20% (0.20), the multiplier is 1/0.20 = 5. When bank reserves are Rs. 1000, the total credit creation = Reserves × Money Multiplier = 1000 × 5 = Rs. 5000. This means the banking system can create Rs. 5000 in total deposits from the initial Rs. 1000 in reserves. -> correct
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