Advertisements
Advertisements
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.
Numerical
Solution
In an economy, the total deposit creation by the banking system is determined using the Money Multiplier formula:
Money Multiplier = `1/("Reserve Ratio")`
Given that the Reserve Ratio is 25% (0.25)
Money Multiplier = `1/0.25`
= 4
The total deposits created in the banking system are calculated as:
Total Deposits = Primary Deposits × Money Multiplier
= 500 × 4
= 2000
Thus, the total deposits created in the banking system will be ₹ 2000.
Total lending is calculated as:
Total Lending = Total Deposits − Primary Deposits
= 2000 − 500
= 1500
Thus, the total lending by the banking system will be ₹ 1500.
shaalaa.com
Is there an error in this question or solution?
