Solved by Expert Tutors
The Cash Reserve Ratio requirement imposed by the RBI is 3%. i) Suppose Bank A receives a Rs. 5,000 deposit from a customer.
Solved by Expert Tutors
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.

nec facilisis.acinia pulvi

ic

llentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, u

inia pulvinar tortor

usce dui lectus, congue vem risul

ongue ve

sus ante, dapibus a molestie consequ

sum dol

facilisis

rem ipsum dolor sit amet, consectetur adi

, ultricerisus

facilisis. Pellentesque dapibus efficitur la

iscing elit. Nam

m ipsum

sum

ctum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetu

o. Donec aliquet. Lorem ipsum dolo

itur laoreet. Nam risus ante, dapibac, dictum vitae odio. Donec aliquet.congue vel

entesque dapibus efficitur laoreet. Nam risus ante, dapibus a mo

su

itur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac mag

or nec facilisis. Pell, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac,

or nec facilisis. Pellentesque dapibus efficitur laoreet.

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

Browse Documents