Suppose, for a hypothetical economy, Reserve Ratio (RR) decreases from 25% to 20%, the total deposits would __________ to ₹ __________ , if primary deposits are ₹ 1,000.
(Choose the correct option to fill in the blanks)
Suppose, for a hypothetical economy, Reserve Ratio (RR) decreases from 25% to 20%, the total deposits would __________ to ₹ __________ , if primary deposits are ₹ 1,000.
(Choose the correct option to fill in the blanks)
Show Hint
- increase, 5,000
- decrease, 5,000
- increase, 4,000
- decrease, 4,000
The Correct Option is A
Solution and Explanation
Total deposits = Primary deposit x (1 / RR). A lower reserve ratio lets banks lend more, so the total deposits created rise.
Step 2: Calculation at the old ratio:
RR = 25% = 0.25. Multiplier = 1 / 0.25 = 4.
Total deposits = 1,000 x 4 = Rs. 4,000.
Step 3: Calculation at the new ratio:
RR = 20% = 0.20. Multiplier = 1 / 0.20 = 5.
Total deposits = 1,000 x 5 = Rs. 5,000.
Step 4: Compare:
Total deposits go from Rs. 4,000 to Rs. 5,000, so they increase to Rs. 5,000. This is option (A).
(B) and (D) say decrease, which is the wrong direction. (C) gives Rs. 4,000, which is the old value at 25%.
Final Answer:
Total deposits increase to Rs. 5,000. This is option (A).
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