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