CA Foundation P4 · Chapter 8 · Question 8 of 15
The currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. If high-powered money is Rs. 500 crore, the money supply is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 2,000 crore
Explanation
Money multiplier m = (1 + c) / (c + r) = (1 + 0.2) / (0.2 + 0.1) = 1.2 / 0.3 = 4. Money supply = m x H = 4 x 500 = Rs. 2,000 crore. Using the simple multiplier 1/r = 10 would wrongly give Rs. 5,000 crore.
More Money Market MCQs
- Q10When the central bank purchases government securities in the open market, it:
- Q11An increase in the cash reserve ratio (CRR) will, other things being equal:
- Q12The repo rate is the rate at which:
- Q13Under the amended RBI Act, 1934, the policy repo rate required to achieve the inflation target is determined by:
- Q14In the Baumol-Tobin inventory approach to transactions demand for money, an increase in the interest rate will: