Question

Suppose the cash reserve ratio is 5 percent in a country. Assume that commercial banks keep zero excess reserve and the cash-to-deposit ratio is 5 percent. To increase the money supply by Rs. 10,500 crores, the central bank of the country should inject Rs. crores (in integer).

Answer 1

Correct Answer: 1000

\[ \text{The money multiplier } m \text{ is given by:} \] \[ m = \frac{1}{\text{CRR} + \text{CDR}} \] \[ = \frac{1}{0.05 + 0.05} = 10 \] \[ \text{To increase the money supply by Rs. 10,500 crores:} \] \[ \text{Required Injection} = \frac{\text{Increase in money supply}}{m} \] \[ \text{Given Increase in money supply} = 10,000 \text{ crores (approximate to nearest integer)} \] \[ \text{Required Injection} = \frac{10,000}{10} = 1,000 \text{ crores} \] \[ \text{Thus, the central bank should inject Rs. 1,000 crores.} \]