Question

If the Legal Reserve Ratio (\(LRR\)) is 20%, the Money Multiplier will be:

• A. 2
• B. 5
• C. 10
• D. 20

Hint:

Higher the LRR, lower the Money Multiplier and lower the credit creation. The Central Bank uses LRR (CRR + SLR) as a tool to control money supply in the economy.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The Money Multiplier shows how much the money supply increases for every unit of primary deposit in the banking system. It is inversely related to the Legal Reserve Ratio (LRR).

Step 2: Detailed Explanation:
The formula for the Money Multiplier is:
\[ \text{Money Multiplier} = \frac{1}{LRR} \]
Given: \(LRR = 20% = 0.20\)
\[ \text{Money Multiplier} = \frac{1}{0.20} = \mathbf{5} \]
This means for every ₹ 1 of initial deposit, the banking system can create ₹ 5 of total money supply.

Step 3: Final Answer:
The Money Multiplier = \(\mathbf{5}\).