Question:
Suppose a customer makes a deposit of Rs. 400 million with a commercial bank which keeps Rs. 80 million as statutory reserve for this deposit. All else constant, how much the bank have in excess reserves? What is the size of the deposit multiplier?
(1) Excess: 400; Mult: 0.02
(2) Excess: 400; Mult: 0.2
(3) Excess: 320; Mult: 20.0
(4) Excess: 320; Mult: 5.0
(5) Excess: 320; Mult: 0.2
Correct Answer:
(4)
Answer Explanation:
Excess Reserves = Total Deposit – Statutory Reserve = $400 – 80 = 320$. The Reserve Ratio (RR) is $80 / 400 = 0.2$ (or 20%). The Deposit Multiplier formula is $1 / RR$, so $1 / 0.2 = 5.0$.
Topic: Money and Banking Year: 2021
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