Question:
If a person deposits Rs. 5 000 in a current account at a commercial bank which maintains the required reserve ratio, the immediate effect is:
(1) a decrease in the money supply of Rs. 5 000.
(2) an increase in the money supply of Rs. 5 000.
(3) no change in the money supply, but in the future the money supply may expand because bank now has excess reserves.
(4) an increase in the money supply of Rs. 5 000, but in the future the money supply may further expand.
(5) A reduction in excess reserves equal to the amount that this person took out of circulation.
Correct Answer:
(3)
Answer Explanation:
Moving cash into a current account simply converts physical currency into demand deposits, keeping the initial money supply unchanged. However, the deposit provides the bank with new reserves, which after keeping the required ratio, allows them to lend out the “excess” and expand the future money supply.
Topic: Money and Banking Year: 2023
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