Question

A bank receives reserves of ₹100. If the CRR is 20%, what is the maximum total deposit that can be created in the system?

• A. ₹400
• B. ₹100
• C. ₹500
• D. ₹200

Hint:

The money multiplier is the inverse of the CRR. A higher CRR reduces the money multiplier and limits the total deposit creation in the banking system.

Answer 1

The Correct Option is C

The maximum total deposit that can be created in the banking system is determined by the money multiplier. The money multiplier is calculated as the inverse of the Cash Reserve Ratio (CRR).
The formula for the money multiplier is: \[ \text{Money Multiplier} = \frac{1}{\text{CRR}} = \frac{1}{0.20} = 5 \] Therefore, the maximum total deposit is: \[ \text{Maximum Total Deposit} = \text{Initial Reserve} \times \text{Money Multiplier} = ₹100 \times 5 = ₹500 \] Thus, the maximum deposit that can be created in the system is ₹500.