ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Definition: The currency deposit ratio shows the amount of currency that people hold as a proportion of aggregate deposits. Description: An increase in cash deposit ratio leads to a decrease in money multiplier.

Detailed explanation-2: -The deposit multiplier describes how changes in banks’ reserve requirements affect the amount of money or credit they can lend out through deposit expansion. The deposit multiplier is the reciprocal of the required reserve ratio. If a bank is required to keep 20% on hand, the deposit multiplier is five.

Detailed explanation-3: -If the public holds some currency rather than demand deposits, the money supply will not increase by the full-multiplied amount or the $50, 000 maximum. Banks will not receive the maximum amount of new deposits and reserves from which they would be making loans.

Detailed explanation-4: -The deposit multiplier is part of the money supply expansion activity by a bank and is made possible with fractional reserve banking. Banks “create” money, or expand the money supply, in the form of checkable deposits by multiplying their required reserve amount into a larger amount of deposits.