The State Bank buys a Rs 1,000 government bond from you, and you deposit the full Rs 1,000 in your bank. If your bank’s reserve ratio is 20 percent, what is the total potential change in the money supply?
Correct answer A. Rs 5,000
Explanation
With a 20 percent reserve ratio the money multiplier is 1/0.2 = 5, so the new Rs 1,000 of reserves can support up to Rs 5,000 of deposits.
Answer checked How we write and check questions
Discussion