Total deposits in the banking system are Rs. 1,00,000. The RBI conducts an open‑market purchase of government securities worth Rs. 5,000, thereby injecting this amount into the system. If the required reserve ratio is 5 % and banks lend out all excess reserves, calculate the total change in the money supply after the multiplier effect.

Step-by-step solution

1. Initial required reserves = 5 % of Rs. 1,00,000 = Rs. 5,000.
2. After the purchase, banks receive an additional Rs. 5,000 in reserves, all of which is excess.
3. Excess reserves = Rs. 5,000.
4. Money multiplier = $\frac{1}{0.05}=20$.
5. Total change in money supply = excess reserves × multiplier = 5,000 × 20 = Rs. 1,00,000.
6. Thus the net increase in the money supply is Rs. 1,00,000.

Concept tested: Open market operations and money multiplier

Published 4 October 2026 · How this solution was prepared and checked