TutorOn by Sanath Withanage

Question:

If a Rs. 300 million deposit in a commercial bank leads to a Rs. 3000 million increase in the money supply, the reserve requirement must have been
(1) 0.10%.
(2) 0.12%.
(3) 10%.
(4) 12%.
(5) 100%.

Correct Answer:

(3)

Answer Explanation:

The deposit multiplier formula is $1 / text{Reserve Requirement (RR)}$. We know the multiplier is $3000 / 300 = 10$. Therefore, $1 / text{RR} = 10$. Solving for RR gives $RR = 1 / 10 = 0.10$. Expressed as a percentage, $0.10 times 100 = 10%$.

Topic: Money and Banking Year: 2019