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Questions › IIT JAM › IIT JAM 2022 › Q54
2 marksMacroeconomics › Money supply and the banking multiplier › The monetary base and the money multiplierModerateabout 2 min

IIT JAM 2022 Question 54: Money supply and the banking multiplier

ACD Bank holds total deposits of Rs. 256412. The Reserve Bank reduces the cash reserve ratio (CRR) from 4.5% to 3.5%. The additional money supply generated by ACD Bank is Rs. _______ (in integer).

Answer and worked solution

Answer: 1628012 to 1628013

With a required reserve ratio rrr, deposits of DDD support a money stock of Dr\dfrac{D}{r}rD​ through the deposit multiplier.

The additional money created when rrr falls from 0.0450.0450.045 to 0.0350.0350.035 is D(10.035−10.045)=256412(28.5714−22.2222)=1,628,012.7D\left(\dfrac{1}{0.035} - \dfrac{1}{0.045}\right) = 256412(28.5714 - 22.2222) = 1{,}628{,}012.7D(0.0351​−0.0451​)=256412(28.5714−22.2222)=1,628,012.7. The answer, within the accepted range, is about 1,628,0131{,}628{,}0131,628,013.

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.

TestStop has 28 past-paper questions on this subtopic; the nearest in year are below.

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