The value of credit multiplier will be high when Legal Reserve Ratio is:
The value of credit multiplier will be high when Legal Reserve Ratio is:
(a) Low
(b) High
(c) Zero
(d) Infinity
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Ans – (a)
Explanation:-
The credit multiplier is inversely related to the legal reserve ratio.
In other words, credit 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
The lower the LRR, the higher the value of credit multiplier.
For example:-
If LRR is 20%
Credit Multiplier is 1/20% = 5 times
If LRR is 10%
Credit Multiplier is 1/10% = 10 times
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