On this page · 10 sections 01 The core idea 02 What commercial banks do 03 Reserves 04 Deposit creation, round by round 05 The money multiplier 06 High-powered money 07 Exam shortcuts 08 Common mistakes 09 Quick revision 10 Check your understanding Banks keep only a fraction of each deposit as reserves and lend the rest. The loan is spent and comes back to some bank as a new deposit, which is money. So lending creates money, until the whole first deposit has ended up as reserves.
Its two main functions are accepting deposits (demand deposits such as current and savings accounts; time deposits such as fixed and recurring deposits) and giving loans (term loans, cash credit, overdrafts). It earns the gap between the interest it charges and the interest it pays.
In a bank's balance sheet, deposits are liabilities (owed to depositors); reserves and loans are assets .
On any day only a small share of depositors withdraw, so a bank needs only part of its deposits as cash. It must also keep the share the RBI requires.
Reserve ratio r = reserves ÷ deposits.Required reserves must be held; excess reserves (above the requirement) can be lent. Example 1 · ₹1,000 with r = 10%
Round 1: deposit 1,000; keep 100; lend 900.
Round 2: the 900 is redeposited; keep 90; lend 810.
Round 3: deposit 810; keep 81; lend 729. Deposits so far = 1,000 + 900 + 810 = 2,710.
The rounds shrink because 10% leaks into reserves each time. They add up to 1,000 ÷ 0.1 = 10,000.
Answer Total deposits ₹10,000; credit created ₹9,000
Reserve ratio Multiplier 5% 20 10% 10 20% 5 25% 4
A higher reserve ratio means a smaller multiplier. The process also runs in reverse: a withdrawal of cash cuts deposits by a multiple of it.
1 ÷ r assumes every loan comes back as a deposit and banks hold no excess reserves. If banks keep more than the legal minimum, use the ratio they actually keep.
High-powered money (reserve money) H = currency held by the public + reserves of banks. It is the RBI's liability, and banks build deposits on top of it.
cdr is the currency-deposit ratio (cash the public keeps per rupee of deposits), rdr the reserve-deposit ratio. With cdr = 0.2 and rdr = 0.1, mm = 1.2 ÷ 0.3 = 4. Cash kept outside banks lowers the multiplier, because it cannot be lent.
Example 2 · An open market purchase
The RBI buys ₹100 crore of government bonds from banks and the money multiplier is 5. By how much can money supply rise?
Banks' reserves, and so H, rise by 100.
Money supply can rise by 5 × 100 = ₹500 crore.
Multiplier = 1 ÷ r; total deposits = initial × multiplier.
Credit created = total deposits − initial deposit.
r = 1 ÷ multiplier; initial deposit = total ÷ multiplier.
M = mm × H.
Giving total deposits when the question asks for credit (loans) created.
Using 1 ÷ (1 − r), which is the investment multiplier's shape.
Counting deposits as a bank's assets.
Forgetting that cash held by the public cuts the multiplier.
Banks
Accept deposits, give loans
Deposits are liabilities; reserves and loans are assets
Multiplier
mm = 1 ÷ r
Total deposits = initial deposit × mm
Credit created = total − initial
High-powered money
H = currency with the public + bank reserves
M = mm × H; mm = (1 + cdr) ÷ (cdr + rdr)
How the RBI uses reserves and rates to steer all this is in the central bank and monetary policy .
Next · 09 Quick revision → Check your understanding 58 questions, grouped by type, easy to hard. Pick an answer and check it. The worked solution opens when you ask for it.
What commercial banks do Q1 of 58 Q1
What commercial banks do 10 questions The two main functions of a commercial bank are
Options for question 1 A Option A printing currency and controlling credit B Option B accepting deposits and giving loans C Option C collecting taxes and paying pensions D Option D setting the repo rate and the CRR
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Show the explanation Hide the explanation Answer B · accepting deposits and giving loans
Banks take deposits from savers and lend them to borrowers.
Printing currency and controlling credit are the central bank's jobs.
A commercial bank earns its profit mainly from
Options for question 2 A Option A printing money B Option B taxes on deposits C Option C selling its branches D Option D the gap between lending and deposit rates
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Show the explanation Hide the explanation Answer D · the gap between lending and deposit rates
Lending rates are higher than deposit rates; the gap pays for costs and leaves profit.
Which of these is NOT a function of a commercial bank?
Options for question 3 A Option A Accepting deposits B Option B Giving loans and overdrafts C Option C Issuing currency notes D Option D Collecting cheques for customers
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Show the explanation Hide the explanation Answer C · Issuing currency notes
In India, only the RBI issues currency notes (the ₹1 note apart, issued by the government).
Match each banking service with its type.
List I List II A. A fixed deposit for two years I. A form of loan B. A current account for a business II. Time deposit C. An overdraft allowed on a current account III. General utility service D. Renting a safe deposit locker IV. Demand deposit
Options for question 4 A Option A A-II, B-IV, C-I, D-III B Option B A-II, B-I, C-III, D-IV C Option C A-I, B-II, C-IV, D-III D Option D A-III, B-IV, C-I, D-II
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Show the explanation Hide the explanation Answer A · A-II, B-IV, C-I, D-III
A fixed deposit is withdrawn after a set time; a current account on demand.
An overdraft lets a customer draw more than his balance: a loan. A locker is a utility service.
In a bank's balance sheet, deposits are
Options for question 5 A Option A assets, because the bank holds the money B Option B income of the bank C Option C liabilities, because the bank owes them to depositors D Option D capital of the bank's owners
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Show the explanation Hide the explanation Answer C · liabilities, because the bank owes them to depositors
Deposits must be repaid on demand or at maturity, so they are liabilities.
Reserves and loans are the bank's assets.
Read the two statements and choose the correct option.
I. Loans given by a bank are its assets.
II. Reserves kept by a bank are its liabilities.
Options for question 6 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer A · Only I
Borrowers owe the bank, so loans are assets. I is true.
Reserves are cash the bank holds: assets, not liabilities. II is false.
Banks are called 'financial intermediaries' because they
Options for question 7 A Option A stand between the government and the RBI B Option B bring together savers who have spare funds and borrowers who need funds C Option C buy and sell goods for customers D Option D produce goods in the middle stage
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Show the explanation Hide the explanation Answer B · bring together savers who have spare funds and borrowers who need funds
Savers deposit; banks lend to firms and households who want to spend or invest.
Assertion (A): Banks can lend most of their deposits instead of keeping all of them as cash.
Reason (R): On a normal day, only a small share of depositors want to withdraw their money.
Options for question 8 A Option A Both A and R are true, and R is the correct explanation of A. B Option B Both A and R are true, but R is not the correct explanation of A. C Option C A is true, but R is false. D Option D A is false, but R is true.
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Show the explanation Hide the explanation Answer A · Both A and R are true, and R is the correct explanation of A.
Withdrawals on any day are a small fraction of deposits, and new deposits keep coming in.
So banks keep a fraction as reserves and lend the rest. R explains A.
A recurring deposit, in which a fixed sum is paid in every month for a set period, is a
Options for question 9 A Option A demand deposit B Option B loan C Option C time deposit D Option D reserve with the RBI
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Show the explanation Hide the explanation Answer C · time deposit
It can be withdrawn freely only at the end of the period, so it is a time deposit.
Assertion (A): A bank cannot lend out all of its deposits.
Reason (R): It must keep part of its deposits as reserves to meet withdrawals and the RBI's requirement.
Options for question 10 A Option A Both A and R are true, and R is the correct explanation of A. B Option B Both A and R are true, but R is not the correct explanation of A. C Option C A is true, but R is false. D Option D A is false, but R is true.
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Show the explanation Hide the explanation Answer A · Both A and R are true, and R is the correct explanation of A.
Reserves are needed both by law and to pay depositors who withdraw. R explains A.
Reserves and the reserve ratio 9 questions The reserve ratio of a bank is
Options for question 11 A Option A the fraction of loans that are repaid B Option B the interest rate on deposits C Option C the fraction of deposits it keeps as reserves D Option D the ratio of its branches to its customers
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Show the explanation Hide the explanation Answer C · the fraction of deposits it keeps as reserves
Reserve ratio = reserves ÷ deposits.
A bank has deposits of ₹500 crore and the required reserve ratio is 20%. Its required reserves are
Options for question 12 A Option A ₹25 crore B Option B ₹100 crore C Option C ₹400 crore D Option D ₹2,500 crore
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Show the explanation Hide the explanation Answer B · ₹100 crore
Required reserves = 20% of 500 = ₹100 crore.
The other ₹400 crore can be lent.
A bank has deposits of ₹800 crore and keeps reserves of ₹120 crore. Its reserve ratio is
Options for question 13 A Option A 6.7% B Option B 12% C Option C 15% D Option D 85%
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Show the explanation Hide the explanation Answer C · 15%
Reserve ratio = 120 ÷ 800 = 0.15 = 15%.
Read the two statements and choose the correct option.
I. Reserves held with the RBI under the CRR earn no interest for banks.
II. Banks may lend their required reserves when demand for loans is high.
Options for question 14 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer A · Only I
CRR balances are kept idle with the RBI. I is true.
Required reserves must be held; only excess reserves can be lent. II is false.
A bank has deposits of ₹1,000 crore and reserves of ₹250 crore. The required reserve ratio is 20%. Its excess reserves are
Options for question 15 A Option A ₹50 crore B Option B ₹200 crore C Option C ₹250 crore D Option D ₹750 crore
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Show the explanation Hide the explanation Answer A · ₹50 crore
Required reserves = 20% of 1,000 = 200.
Excess reserves = 250 − 200 = ₹50 crore, which the bank could lend.
The Cash Reserve Ratio (CRR) is the share of a bank's deposits that it must keep
Options for question 16 A Option A as cash balances with the RBI B Option B in government securities, gold or cash with itself C Option C as loans to farmers D Option D in foreign currency
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Show the explanation Hide the explanation Answer A · as cash balances with the RBI
CRR balances are held with the RBI and earn no interest.
Holding liquid assets such as government securities with itself is the SLR.
Worth noting
Keeping government securities, gold or cash with the bank itself is the Statutory Liquidity Ratio, not the CRR.
Read the two statements and choose the correct option.
I. A higher reserve ratio leaves banks with less to lend from each deposit.
II. A bank's reserves earn the same interest as its loans.
Options for question 17 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer A · Only I
Lendable share = 1 − reserve ratio, which falls as the ratio rises. I is true.
Cash reserves earn little or nothing; that is why banks lend the rest. II is false.
A bank has deposits of ₹2,000 crore and the reserve ratio is 4%. The most it can lend is
Options for question 18 A Option A ₹80 crore B Option B ₹1,920 crore C Option C ₹2,000 crore D Option D ₹50,000 crore
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Show the explanation Hide the explanation Answer B · ₹1,920 crore
Reserves = 4% of 2,000 = 80.
This bank alone can lend 2,000 − 80 = ₹1,920 crore.
Worth noting
₹50,000 crore is what the whole banking system could build on the deposit, not what one bank can lend.
Assertion (A): The RBI can change the amount banks are able to lend by changing the CRR.
Reason (R): The CRR fixes the share of deposits that banks must keep with the RBI and cannot lend.
Options for question 19 A Option A Both A and R are true, and R is the correct explanation of A. B Option B Both A and R are true, but R is not the correct explanation of A. C Option C A is true, but R is false. D Option D A is false, but R is true.
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Show the explanation Hide the explanation Answer A · Both A and R are true, and R is the correct explanation of A.
Raising the CRR locks up more of each deposit; cutting it frees funds for loans.
R explains A.
Deposit creation, round by round 10 questions Credit creation by banks means
Options for question 20 A Option A banks printing currency notes B Option B banks creating deposits several times their reserves by lending C Option C banks giving credit cards only D Option D the RBI giving loans to the government
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Show the explanation Hide the explanation Answer B · banks creating deposits several times their reserves by lending
Loans become deposits, which support more loans, so deposits grow to a multiple of reserves.
A person deposits ₹1,000 in a bank and the reserve ratio is 10%. In the first round, the bank can lend
Options for question 21 A Option A ₹100 B Option B ₹900 C Option C ₹1,000 D Option D ₹10,000
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Show the explanation Hide the explanation Answer B · ₹900
Reserves = 10% of 1,000 = 100.
The bank lends the rest: 1,000 − 100 = ₹900.
Continuing: the ₹900 loan is spent and redeposited in the banking system. With the reserve ratio at 10%, the second-round loan is
Options for question 22 A Option A ₹90 B Option B ₹800 C Option C ₹810 D Option D ₹900
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Show the explanation Hide the explanation Answer C · ₹810
The new deposit is 900; reserves on it = 90.
New loan = 900 − 90 = ₹810.
Assertion (A): Commercial banks create money.
Reason (R): Every loan a bank makes is spent and comes back to banks as a new demand deposit, which is money.
Options for question 23 A Option A Both A and R are true, and R is the correct explanation of A. B Option B Both A and R are true, but R is not the correct explanation of A. C Option C A is true, but R is false. D Option D A is false, but R is true.
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Show the explanation Hide the explanation Answer A · Both A and R are true, and R is the correct explanation of A.
Demand deposits are part of the money supply.
Lending creates new deposits, so it adds to money. R explains A.
Deposit creation by banks is limited by
Options for question 24 A Option A the number of bank branches B Option B the rate of GST C Option C the exchange rate D Option D the reserve ratio
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Show the explanation Hide the explanation Answer D · the reserve ratio
Each round, a share of the new deposit leaks into reserves, so the rounds shrink.
When all of the first deposit has ended up as reserves, creation stops.
Which of these assumptions is made in the simple theory of deposit creation (multiplier = 1 ÷ r)?
Options for question 25 A Option A Borrowers keep all their loans in cash B Option B Banks keep 100% reserves C Option C There is no reserve requirement and no limit D Option D All loans return as deposits; no excess reserves
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Show the explanation Hide the explanation Answer D · All loans return as deposits; no excess reserves
If money leaked out as cash or banks held extra reserves, creation would be smaller than 1 ÷ r.
An initial deposit of ₹200 crore is made and the reserve ratio is 20%. The loan made in the second round is
Options for question 26 A Option A ₹32 crore B Option B ₹40 crore C Option C ₹128 crore D Option D ₹160 crore
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Show the explanation Hide the explanation Answer C · ₹128 crore
Round 1: reserves 40, loan 160, which is redeposited.
Round 2: reserves on 160 = 32, loan = 160 − 32 = ₹128 crore.
An initial deposit of ₹1,000 is made and the reserve ratio is 10%. Counting the initial deposit as the first round, what are total deposits after three rounds?
Options for question 27 A Option A ₹2,710 B Option B ₹3,000 C Option C ₹3,439 D Option D ₹10,000
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Show the explanation Hide the explanation Answer A · ₹2,710
Deposits created: round 1 = 1,000; round 2 = 900; round 3 = 810.
Total after three rounds = 1,000 + 900 + 810 = ₹2,710; it keeps rising towards ₹10,000.
Worth noting
₹3,439 also counts ₹729, the deposit that would arrive only in a fourth round.
Read the two statements and choose the correct option.
I. Deposit creation is larger if borrowers hold part of their loans as cash.
II. Deposit creation is smaller if banks keep reserves above the required level.
Options for question 28 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer B · Only II
Cash kept outside banks does not come back as deposits, so creation is smaller. I is false.
Excess reserves are funds not lent, which also cuts creation. II is true.
An initial deposit of ₹500 crore is made and the reserve ratio is 10%. Total loans created by the banking system are
Options for question 29 A Option A ₹50 crore B Option B ₹450 crore C Option C ₹4,500 crore D Option D ₹5,000 crore
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Show the explanation Hide the explanation Answer C · ₹4,500 crore
Total deposits = 500 × 10 = 5,000.
Total loans = 5,000 − 500 = ₹4,500 crore.
The money multiplier 17 questions With a reserve ratio r and no cash held back by the public, the money multiplier is
Options for question 30 A Option A r B Option B 1 − r C Option C 1 ÷ r D Option D 1 ÷ (1 − r)
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Show the explanation Hide the explanation Answer C · 1 ÷ r
Total deposits = initial deposit × 1 ÷ r.
Worth noting
1 ÷ (1 − r) looks like the investment multiplier formula, which uses the MPC; here the leak is r.
If the reserve ratio is 20%, the money multiplier is
Options for question 31 A Option A 0.2 B Option B 1.25 C Option C 5 D Option D 20
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Show the explanation Hide the explanation Answer C · 5
Money multiplier = 1 ÷ 0.2 = 5.
If the reserve ratio is 5%, the money multiplier is
Options for question 32 A Option A 0.05 B Option B 5 C Option C 20 D Option D 95
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Show the explanation Hide the explanation Answer C · 20
1 ÷ 0.05 = 20.
An initial deposit of ₹1,000 crore is made and the reserve ratio is 20%. Total deposits created in the banking system are
Options for question 33 A Option A ₹1,200 crore B Option B ₹4,000 crore C Option C ₹5,000 crore D Option D ₹20,000 crore
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Show the explanation Hide the explanation Answer C · ₹5,000 crore
Multiplier = 1 ÷ 0.2 = 5.
Total deposits = 1,000 × 5 = ₹5,000 crore.
Worth noting
₹4,000 crore is the new credit created (total deposits minus the first deposit), not total deposits.
An initial deposit of ₹1,000 crore is made and the reserve ratio is 20%. How much credit (loans) do banks create in all?
Options for question 34 A Option A ₹800 crore B Option B ₹1,000 crore C Option C ₹4,000 crore D Option D ₹5,000 crore
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Show the explanation Hide the explanation Answer C · ₹4,000 crore
Total deposits = 1,000 × 5 = 5,000.
Credit created = total deposits − initial deposit = 5,000 − 1,000 = ₹4,000 crore.
If total deposits created are ₹8,000 crore from an initial deposit of ₹2,000 crore, the reserve ratio is
Options for question 35 A Option A 4% B Option B 20% C Option C 25% D Option D 40%
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Show the explanation Hide the explanation Answer C · 25%
Multiplier = 8,000 ÷ 2,000 = 4.
Reserve ratio = 1 ÷ 4 = 0.25 = 25%.
If the reserve ratio is raised from 10% to 20%, the money multiplier
Options for question 36 A Option A falls from 10 to 5 B Option B rises from 5 to 10 C Option C stays at 10 D Option D falls from 10 to 8
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Show the explanation Hide the explanation Answer A · falls from 10 to 5
1 ÷ 0.1 = 10 and 1 ÷ 0.2 = 5.
Doubling the reserve ratio halves the multiplier.
Assertion (A): The money multiplier is greater than 1.
Reason (R): Banks keep only a fraction of deposits as reserves and lend the rest, which returns as new deposits.
Options for question 37 A Option A Both A and R are true, and R is the correct explanation of A. B Option B Both A and R are true, but R is not the correct explanation of A. C Option C A is true, but R is false. D Option D A is false, but R is true.
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Show the explanation Hide the explanation Answer A · Both A and R are true, and R is the correct explanation of A.
Since r is less than 1, 1 ÷ r is more than 1.
R is the banking process behind it.
With a reserve ratio of 12.5%, a fresh deposit of ₹400 crore can lead to total deposits of
Options for question 38 A Option A ₹50 crore B Option B ₹2,800 crore C Option C ₹3,200 crore D Option D ₹5,000 crore
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Show the explanation Hide the explanation Answer C · ₹3,200 crore
Multiplier = 1 ÷ 0.125 = 8.
Total deposits = 400 × 8 = ₹3,200 crore.
Read the two statements and choose the correct option.
I. A fall in the reserve ratio raises the money multiplier.
II. The money multiplier works in reverse when deposits are withdrawn from banks.
Options for question 39 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer C · Both I and II
1 ÷ r rises as r falls. I is true.
A withdrawal cuts reserves, so banks must cut loans by a multiple of it. II is true.
The money multiplier is 10. The reserve ratio is
Options for question 40 A Option A 1% B Option B 10% C Option C 90% D Option D 100%
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Show the explanation Hide the explanation Answer B · 10%
r = 1 ÷ multiplier = 1 ÷ 10 = 0.1 = 10%.
Read the two statements and choose the correct option.
I. The money multiplier = total deposits created ÷ initial deposit.
II. The money multiplier = initial deposit ÷ total deposits created.
Options for question 41 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer A · Only I
The multiplier says how many times the first deposit total deposits become. I is true, II is its inverse and false.
The money multiplier is 8. An initial deposit of ₹500 crore is made. Required reserves held across the banking system at the end of the process are
Options for question 42 A Option A ₹62.5 crore B Option B ₹500 crore C Option C ₹3,500 crore D Option D ₹4,000 crore
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Show the explanation Hide the explanation Answer B · ₹500 crore
Reserve ratio = 1 ÷ 8 = 12.5%; total deposits = 500 × 8 = 4,000.
Reserves = 12.5% of 4,000 = ₹500 crore: the whole first deposit ends up as reserves.
Worth noting
₹62.5 crore is the reserve kept on the first deposit only.
The legal reserve ratio is 10% but banks choose to keep 20% of deposits as reserves. A fresh deposit of ₹100 crore creates total deposits of
Options for question 43 A Option A ₹200 crore B Option B ₹500 crore C Option C ₹750 crore D Option D ₹1,000 crore
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Show the explanation Hide the explanation Answer B · ₹500 crore
What limits lending is the share banks actually keep: 20%.
Multiplier = 1 ÷ 0.2 = 5, so total deposits = 100 × 5 = ₹500 crore.
Worth noting
₹1,000 crore uses the legal 10%, but banks hold 20%, so they lend less.
The reserve ratio is 25%. To create total deposits of ₹2,000 crore, the initial deposit must be
Options for question 44 A Option A ₹250 crore B Option B ₹500 crore C Option C ₹1,500 crore D Option D ₹8,000 crore
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Show the explanation Hide the explanation Answer B · ₹500 crore
Multiplier = 1 ÷ 0.25 = 4.
Initial deposit = 2,000 ÷ 4 = ₹500 crore.
Fresh deposits of ₹1,000 crore come into banks. If the reserve ratio is cut from 20% to 10%, the total deposits that can be built on them rise by
Options for question 45 A Option A ₹500 crore B Option B ₹1,000 crore C Option C ₹5,000 crore D Option D ₹10,000 crore
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Show the explanation Hide the explanation Answer C · ₹5,000 crore
At 20%: 1,000 × 5 = 5,000. At 10%: 1,000 × 10 = 10,000.
Rise = 10,000 − 5,000 = ₹5,000 crore.
Worth noting
₹10,000 crore is the new total, not the rise.
The public withdraws ₹100 crore in cash from banks and keeps it at home. With a reserve ratio of 10% and banks fully lent out, deposits can fall by up to
Options for question 46 A Option A ₹10 crore B Option B ₹100 crore C Option C ₹900 crore D Option D ₹1,000 crore
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Show the explanation Hide the explanation Answer D · ₹1,000 crore
Banks lose ₹100 crore of reserves.
To restore the 10% ratio, deposits must shrink by 100 × 10 = ₹1,000 crore.
High-powered money 12 questions High-powered money (reserve money) consists of
Options for question 47 A Option A demand deposits and time deposits B Option B currency held by the public and the reserves of commercial banks C Option C M3 and post office deposits D Option D loans given by commercial banks
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Show the explanation Hide the explanation Answer B · currency held by the public and the reserves of commercial banks
High-powered money is the money issued by the central bank: currency, wherever it is held, and banks' deposits with the RBI.
Banks build deposits on top of it, which is why it is 'high-powered'.
Currency held by the public is ₹300 crore and banks' reserves are ₹100 crore. High-powered money is
Options for question 48 A Option A ₹100 crore B Option B ₹200 crore C Option C ₹300 crore D Option D ₹400 crore
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Show the explanation Hide the explanation Answer D · ₹400 crore
H = currency held by the public + bank reserves = 300 + 100 = ₹400 crore.
High-powered money is ₹400 crore and the money multiplier is 4. Money supply is
Options for question 49 A Option A ₹100 crore B Option B ₹404 crore C Option C ₹1,200 crore D Option D ₹1,600 crore
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Show the explanation Hide the explanation Answer D · ₹1,600 crore
Money supply = money multiplier × high-powered money = 4 × 400 = ₹1,600 crore.
Read the two statements and choose the correct option.
I. High-powered money is created by the central bank.
II. Commercial banks create deposits that are a multiple of their reserves.
Options for question 50 A Option A Only I B Option B Only II C Option C Both I and II D Option D Neither I nor II
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Show the explanation Hide the explanation Answer C · Both I and II
Currency and bank reserves are liabilities of the RBI. I is true.
Banks lend most of each deposit, so deposits build up to a multiple of reserves. II is true.
High-powered money is a liability of
Options for question 51 A Option A commercial banks B Option B households C Option C the stock exchange D Option D the central bank (RBI)
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Show the explanation Hide the explanation Answer D · the central bank (RBI)
Currency notes and banks' deposits with the RBI are claims on the RBI.
Match each term with its meaning.
List I List II A. High-powered money I. Money supply ÷ high-powered money B. Money multiplier II. New deposits that come from banks' lending C. Excess reserves III. Currency with the public + bank reserves D. Credit creation IV. Reserves above the required amount
Options for question 52 A Option A A-III, B-I, C-IV, D-II B Option B A-III, B-IV, C-II, D-I C Option C A-IV, B-III, C-I, D-II D Option D A-II, B-I, C-IV, D-III
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Show the explanation Hide the explanation Answer A · A-III, B-I, C-IV, D-II
H is the base; the multiplier is M ÷ H; excess reserves are unused lending power; credit creation is the deposits that lending produces.
If the RBI buys government bonds worth ₹100 crore from banks and the money multiplier is 5, money supply can rise by up to
Options for question 53 A Option A ₹20 crore B Option B ₹100 crore C Option C ₹400 crore D Option D ₹500 crore
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Show the explanation Hide the explanation Answer D · ₹500 crore
The RBI pays banks ₹100 crore, which adds to their reserves: high-powered money rises by 100.
Money supply can rise by 5 × 100 = ₹500 crore.
High-powered money is ₹500 crore and the money multiplier is 3. Money supply is
Options for question 54 A Option A ₹167 crore B Option B ₹503 crore C Option C ₹1,500 crore D Option D ₹2,000 crore
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Show the explanation Hide the explanation Answer C · ₹1,500 crore
M = 3 × 500 = ₹1,500 crore.
With a currency-deposit ratio (cdr) of 0.2 and a reserve-deposit ratio (rdr) of 0.1, the money multiplier (1 + cdr) ÷ (cdr + rdr) is
Options for question 55 A Option A 3 B Option B 4 C Option C 6 D Option D 10
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Show the explanation Hide the explanation Answer B · 4
(1 + 0.2) ÷ (0.2 + 0.1) = 1.2 ÷ 0.3 = 4.
Cash held by the public lowers the multiplier from 1 ÷ 0.1 = 10.
Worth noting
10 ignores the cash that the public keeps out of banks.
Assertion (A): A rise in the public's currency-deposit ratio lowers the money multiplier.
Reason (R): Cash held outside banks cannot be used by banks to make loans.
Options for question 56 A Option A Both A and R are true, and R is the correct explanation of A. B Option B Both A and R are true, but R is not the correct explanation of A. C Option C A is true, but R is false. D Option D A is false, but R is true.
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Show the explanation Hide the explanation Answer A · Both A and R are true, and R is the correct explanation of A.
The more the public holds as cash, the less returns to banks as deposits to lend.
R explains A.
Money supply is ₹6,000 crore and high-powered money is ₹1,500 crore. The money multiplier is
Options for question 57 A Option A 0.25 B Option B 4 C Option C 4,500 D Option D 7,500
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Show the explanation Hide the explanation Answer B · 4
Money multiplier = M ÷ H = 6,000 ÷ 1,500 = 4.
With a currency-deposit ratio of 0.5 and a reserve-deposit ratio of 0.25, the money multiplier (1 + cdr) ÷ (cdr + rdr) is
Options for question 58 A Option A 1.5 B Option B 2 C Option C 3 D Option D 4
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Show the explanation Hide the explanation Answer B · 2
(1 + 0.5) ÷ (0.5 + 0.25) = 1.5 ÷ 0.75 = 2.
Worth noting
4 is 1 ÷ 0.25, which ignores the cash the public holds.
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NTA's Economics syllabus is three courses: Introductory Microeconomics, Introductory Macroeconomics and Indian Economic Development, each split into units with a list of topics. It prints no chapters and no split of the 50 questions across the courses. So the areas here are NTA's three courses, and the chapters inside them are ours: a unit that covers several ideas, such as consumer behaviour and demand, is split into a chapter for each, so that a chapter can be practised in one sitting. All three courses are here.