Question:
Given a reserve ratio of 10% in an economy with fractional reserve banking system, what is the total amount of deposits resulting from a new deposit of Rs. 50 million according to the deposit multiplier?
(1) Rs. 500 million
(2) Rs. 450 million
(3) Rs. 400 million
(4) Rs. 350 million
(5) Rs. 50 million
Correct Answer:
(1)
Answer Explanation:
The simple deposit multiplier is calculated as 1 / Reserve Ratio. Here, it is 1 / 0.10 = 10. The total amount of deposits created by a new deposit is the initial deposit multiplied by the deposit multiplier: 50 million x 10 = 500 million.
Topic: Money and Banking Year: 2022
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