If total deposit created by commercial banks is Rs.20.000 crores and the primary deposit is Rs.2,500 crores, what is the value of money multiplier and reserve ratio?
Cash Reserves Ratio
(CRR) refers to the proportion of total deposits of the commercial banks
which they must have keep as cash reserves with the central bank. The ratio is
fixed by the central bank and is varied from time to time to control the supply
of money in the economy depending upon the prevailing situation of inflation or
deflation.
Cash reserve ratio = (primary deposit / total deposit) x 100
= (2,500 / 20,000) x 100
= 12.5 %
Multiplier refers to the number of times the commercial banks multiplies the primary deposit in the credit creation process in order to create total deposits.
Multiplier = 1/ Cash reserve ratio
= 100 / 12.5
= 8 times