Module: | Priority Sector, Consumer Protection & Digital Lending
Q84: The "Money Multiplier" in an economy is inversely related to the Reserve Ratios. Mathematically, if banks were required to keep 100% of deposits as reserves (CRR = 100%), what would be the value of the money multiplier?
✅ Correct Answer: C
The correct answer is C. The simple money multiplier is mathematically defined as 1 divided by the Reserve Ratio (1/r). If the central bank mandates a 100% reserve requirement (CRR = 100%), the reserve ratio 'r' becomes 1.0. Therefore, the money multiplier becomes 1 / 1 = 1. In practical economic terms, a multiplier of 1 signifies that the fractional-reserve banking system has been completely neutralized.
Banks must hold every single deposited rupee in reserve and cannot lend anything out.
Consequently, zero new credit or money supply can be created beyond the initial monetary base.
Banks must hold every single deposited rupee in reserve and cannot lend anything out.
Consequently, zero new credit or money supply can be created beyond the initial monetary base.