ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The deposit multiplier, or simple deposit multiplier, is the amount of cash that a bank must keep on hand in order to meet its mandated reserve requirement. The maximum amount of a bank’s “checkable” deposits cannot exceed the amount of the bank’s reserves multiplied by the deposit multiplier.

Detailed explanation-2: -Assume that all banks are required to hold reserves equal to 10% of their checkable deposits. The quantity of reserves banks are required to hold is called required reserves. The reserve requirement is expressed as a required reserve ratio; it specifies the ratio of reserves to checkable deposits a bank must maintain.

Detailed explanation-3: -What are Checkable Deposits? Checkable deposits is a technical term for any demand deposit account against which checks or drafts of any kind may be written. (A demand deposit account means the owner can withdraw funds on demand, with no notice.)

Detailed explanation-4: -A reduction in the required reserve ratio from 20% to 10% is an expansionary monetary policy because it implies that the banks are required to keep a lower proportion of the total deposits in the form of reserves, freeing up money to be given out as loans for credit creation.