Total deposits in the banking system are Rs. 3,00,000. The RBI conducts an open‑market purchase of government securities worth Rs. 6,000, injecting this amount into the system. If the required reserve ratio is 6%, and banks lend out all excess reserves, calculate the total change in the money supply after the multiplier effect.
Answer
Rs. 1,00,000
The correct answer is Rs. 1,00,000 — Step 3: Multiply the RBI’s injection by the multiplier: 6,000 × 16.6667 = 100,000.
Step-by-step solution
- Step 1: Convert the required reserve ratio to decimal: 6% = 0.06.
- Step 2: Compute the money multiplier: 1 ÷ 0.06 = 16.6667.
- Step 3: Multiply the RBI’s injection by the multiplier: 6,000 × 16.6667 = 100,000.
Common mistake: Treating the reserve ratio as 6 instead of 0.06 or omitting the multiplier
Concept tested: Money multiplier
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