Q. 114.7( 3 Votes )

What is money multiplier? How will you determine its value? What ratios play an important role in the determination of the value of the money multiplier?

Answer :

Money multiplier or credit multiplier indicates the maximum amount of additional money that can be legally created by the commercial banks.

The value of money multiplier = 1/LRR


Where


LRR is Legal Reserve Ratio


Legal Reserve Ratio (LRR) is the reserve required to be maintained by the commercial banks as a percentage of their demand deposits.


There are two more ratios which play an important role in the determination of the value of money multiplier, they are cash reserve ratio and cash deposit ratio.


The higher will be the CRR, the lower will be the volume of credit creation and vice-versa


CDR is the ratio between additional money released by RBI and received by public is actually deposited into banks.


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