Suppose in a hypothetical economy, reserve ratio changes from 10% to 20% and the value of primary deposits are Rs. 1,000 crore. Calculate the change in the amount of money creation when reserve ratio changes from 10% to 20%.

Question

Accepted Answer

Calculation of change in money creation:

Given:
Reserve Ratio changes from 10% to 20%
Primary Deposits = Rs. 1,000 crore

Before change (RR = 10%):
Money Multiplier = 1/0.10 = 10
Total Money Created = 1,000 × 10 = Rs. 10,000 crore

After change (RR = 20%):
Money Multiplier = 1/0.20 = 5
Total Money Created = 1,000 × 5 = Rs. 5,000 crore

Change in Money Creation = 10,000 - 5,000 = Rs. 5,000 crore

The money creation capacity reduces by Rs. 5,000 crore when reserve ratio doubles from 10% to 20%.