The Reserve Bank of India has set the cash reserve ratio (CRR) at 4% and the statutory liquidity ratio (SLR) at 6%. If the public holds no cash and banks keep exactly the required reserves, what is the money multiplier?

medium 2 marks Class 12 · Economics · Money and Banking

Answer

Money multiplier = 10

The correct answer is Money multiplier = 10 — Thus the money multiplier equals 10.

Step-by-step solution

Write the formula for the money multiplier when both CRR and SLR are required: $M = \frac{1}{C R R + S L R}$ .
Convert the percentages to decimals: $C R R = 4% = 0.04$ , $S L R = 6% = 0.06$ .
Add the two ratios: $0.04 + 0.06 = 0.10$ .
Take the reciprocal: $\frac{1}{0.10} = 10$ .
Thus the money multiplier equals 10.

Common mistake: Adding CRR and SLR incorrectly (e.g., adding 4 and 6 instead of 0.04 and 0.06) or forgetting to include SLR in the denominator.

Concept tested: Money multiplier (CRR+SLR)