Ans – (c)
We have seen that new deposits in banks lead to the creation of more deposits by banks.
Total deposits created are many times the initial deposits.
The multiple by which deposits can increase due to an initial deposit is called the money multiplier credit multiplier or deposit multiplier.
It is inversely related to the legal reserve ratio. In other words, Money Multiplier is the process by which commercial banks create credit, based upon the reserve ratio and initial deposits.
It is calculated as:
Credit Multiplier = 1/LRR
LRR is 20% or 0.2. So,
Credit Multiplier = 1/0.2 = 5
It signifies that for every unit of money kept as reserve, banks can create 5 units of money.
The value of the money multiplier is determined by LRR.
The higher the value of LRR, the lower the value of money multiplier, and less money is created by the banking system.