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Question

) The Cash Reserve Ratio requirement imposed by the RBI is 3%.

i) Suppose Bank A receives a Rs. 5,000 deposit from a customer. Assuming that it

wishes to hold no excess reserve beyond the regulatory requirement, determine how

much the bank is free to lend (assuming no other restrictions). Show your answer on

Bank A's balance sheet. Assume that the loan created by Bank A ends up as deposit

in Bank B which in turn creates another loan. Using the money multiplier, calculate

the total change in the money supply that will finally result from continuation of the

above process of lending and deposit creation through the banking system.

ii) Consider the following scenarios and explain whether the money multiplier will

increase, decrease or remain unchanged: (a) banks decide to hold excess reserves with

the central banks, (b) more stores start accepting credit cards, (c) people start keeping

some part of the money in cash and only deposit the rest in banks.

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Subject: Business, Economics

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