Suppose the State Bank purchases a Rs 1,000 government bond from you. If you deposit the entire Rs 1,000 in you bank what is the total potential change in the money supply as a result of the State Bank's action if the your bank's reserve ratio is 20 percent ?
Correct answer: B. Rs 5,000
- A. Rs 4,000
- B. Rs 5,000
- C. Rs 1,000
- D. Rs 0
Explanation
With a 20 percent reserve ratio, the simple deposit multiplier is 1/0.20 = 5. A Rs 1,000 reserve injection can therefore support a maximum total increase of Rs 5,000 in deposits and money supply.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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