Question:
Minimum reserves 10%. No currency drains. Customer deposits Rs. 1000 in a current account. What is the maximum amount of increase in total money supply?
(1) Rs. 100
(2) Rs. 1000
(3) Rs. 9000
(4) Rs. 10000
(5) Rs. 11000
Correct Answer:
(3)
Answer Explanation:
The money multiplier is $1 / 0.10 = 10$. A 1000 deposit can support total deposits of 10,000. However, the initial 1000 was already cash held by the public (meaning it was already part of the initial money supply). So, the banking system takes that existing 1000 and creates $10,000 – 1000 = 9,000$ in brand-new credit/money supply.
Topic: Money and Banking Year: 2019
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