Ans – (b)
Money Multiplier:- The money multiplier is the number by which total deposits can increase due to a given change in deposits.
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:
Money Multiplier = 1/LRR
LRR is 20% or 0.2 so,
Money Multiplier = 1/0.2 = 5 times
It signifies that for every unit of money kept as reserves, banks are able to create 5 units of money.
The value of the money multiplier is determined by LRR.
The higher the value of LRR, the lower is the value of the money multiplier and less money is created by the banking system.
Money multiplier is also known as Deposit Multiplier and Credit Multiplier