ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The deposit multiplier is the maximum amount of money that a bank can create for each unit of money it holds in reserves. The deposit multiplier involves the percentage of the amount on deposit at the bank that can be loaned. That percentage normally is determined by the reserve requirement set by the Federal Reserve.

Detailed explanation-2: -Banks create money by making loans. A bank loans or invests its excess reserves to earn more interest. A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar. The increase in the money supply is the money multiplier.

Detailed explanation-3: -The money multiplier essentially tells economists how much the money supply could increase as banks’ excess reserves increase. The formula is 1/r, where r is the reserve ratio. In short, it is the reciprocal of r.

Detailed explanation-4: -Value of money multiplier = 1/LRR which is equal to 1/0.1 = 10 Initial deposit was Rs. 500 crores Hence Total Deposit will be Initial Deposit × Money Multiplier = 500 ×10 = 5000 Crores www.vedantu.com 4 Page 5 Q17.

Detailed explanation-5: -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.