Consider the following Table. | Month | Currency in Circulation | Cash with Banks | Currency with the Public | Other Deposits with the RBI | Bankers' Deposits with the RBI | Demand Deposits | Time Deposits | April | 2523 | 98 | 2425 | 40 | 457 | 1582 | 12988 | May | 2611 | 98 | 2513 | 42 | 468 | 1565 | 13112 | June | 2661 | 94 | 2567 | 39 | 484 | 1573 | 13141 | (All values are in Rupees Thousand Crore) Based on the given data, the average Broad Money Multiplier for the period April-June is (round off to three decimal places).

2 marksMacroeconomicsMoney supply and the banking multiplierThe monetary base and the money multiplierHardabout 4 min

GATE 2021 Question 33: Money supply and the banking multiplier

Consider the following Table.

Month	Currency in Circulation	Cash with Banks	Currency with the Public	Other Deposits with the RBI	Bankers' Deposits with the RBI	Demand Deposits	Time Deposits
April	2523	98	2425	40	457	1582	12988
May	2611	98	2513	42	468	1565	13112
June	2661	94	2567	39	484	1573	13141

(All values are in Rupees Thousand Crore)

Based on the given data, the average Broad Money Multiplier for the period April-June is ______ (round off to three decimal places).

Answer and worked solution

Answer: 5.534

Broad Money (M3) = Currency with the Public + Demand Deposits + Time Deposits + Other Deposits with the RBI.

Reserve Money (Monetary Base) = Currency in Circulation + Bankers' Deposits with the RBI + Other Deposits with the RBI.

April: $M3 = 2425+1582+12988+40 = 17{,}035$ ; $RM = 2523+457+40 = 3{,}020$ ; Multiplier $= 17{,}035/3{,}020 \approx 5.641$

May: $M3 = 2513+1565+13112+42 = 17{,}232$ ; $RM = 2611+468+42 = 3{,}121$ ; Multiplier $= 17{,}232/3{,}121 \approx 5.521$

June: $M3 = 2567+1573+13141+39 = 17{,}320$ ; $RM = 2661+484+39 = 3{,}184$ ; Multiplier $= 17{,}320/3{,}184 \approx 5.440$

Average multiplier $= \dfrac{5.641+5.521+5.440}{3} \approx 5.534$

Therefore the average Broad Money Multiplier for April-June is approximately 5.534.

The trap: 5.500

The most common error is misclassifying which table columns belong to M3 (broad money, the numerator) versus Reserve Money (the monetary base, the denominator) — 'Cash with Banks' is deliberately included as a distractor column that belongs to neither aggregate in the standard formula and should NOT be used in either sum.

Money supply and the banking multiplier has come up 74 times in 7 exams since 2005.

What this question tests

This question is on The monetary base and the money multiplier, part of Money supply and the banking multiplier in Macroeconomics.

How the money supply is built from high-powered money, and what sets the multiplier.

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