Question

Suppose, a banking system received primary deposits of ₹ 1,000 and as a result commercial banks created credit worth ₹ 5,000.

The value of Reserve Ratio in the given situation would be ___________ percent.

(Choose the correct option to fill in the blank)

• A. 10
• B. 20
• C. 25
• D. 40

Hint:

Deposit multiplier = total deposits / primary deposit = 5,000 / 1,000 = 5. Reserve ratio = 1 / 5 = 20%.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Banks lend out all but a small part of each deposit. The multiple by which deposits grow is the money multiplier = 1 / RR.
Here the system ends with total deposits of Rs. 5,000 from a primary deposit of Rs. 1,000.

Step 2: Key Formula:
Money multiplier = Total deposits / Primary deposit.
Money multiplier = 1 / RR, so RR = 1 / Money multiplier.

Step 3: Calculation:
Money multiplier = 5,000 / 1,000 = 5.
RR = 1 / 5 = 0.20 = 20%.

Step 4: Check the other options:
(A) RR = 10% gives a multiplier of 10 and total deposits of Rs. 10,000.
(C) RR = 25% gives a multiplier of 4 and total deposits of Rs. 4,000.
(D) RR = 40% gives a multiplier of 2.5 and total deposits of Rs. 2,500.
Only 20% gives Rs. 5,000.

Final Answer:
The reserve ratio is 20 percent. This is option (B).