Ans – (a)
The other name of Money Multiplier are:
(i) Credit Multiplier
(ii) Deposit Multiplier
Money multiplier is the formula that calculates, how much money money a commercial bank can create.
In this whole process, Money is created through offering credit (lending) to the public.
This credit is deposited into new demand deposits.
Thus Money, credit, and deposits are multiplied at the same rate.
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 or Credit Multiplier or Deposit Multiplier
LRR is 20% or 0.2
Money Multiplier = 1/0.2 = 5
It signifies that for every unit of money kept as reserves, banks are able to create 5 units of money.
Formulae Associated with Credit Creation
(i) Money Multiplier or Credit Multiplier or Deposit Multiplier
(ii) Total Credit Creation or Total Deposits Created = Initial or Primary Deposits Money Multiplier
Total Credit Creation = Initial Deposits 1/LRR