"When initial deposits in the credit creation process remains same, the total amount of credit created rises as the value of money multiplier increases." Defend or refute the above statement with the help of hypothetical numerical example. "The Central Bank maintains reserves of all commercial banks and use to settle interbank claims." Do you agree with the given statement ? Give valid explanation in support of your answer.

Question

Accepted Answer

I defend the statement. When initial deposits remain same, total credit created rises as money multiplier increases.

Justification:
1. Money Multiplier = 1/LRR
2. If LRR decreases, Money Multiplier increases
3. Total Credit = Initial Deposits × Money Multiplier
4. With constant initial deposits, higher multiplier means more credit

Numerical Example:
Initial Deposits = Rs. 1,000 crore

Case 1: LRR = 20%
Money Multiplier = 1/0.20 = 5
Total Credit = 1,000 × 5 = Rs. 5,000 crore

Case 2: LRR = 10%
Money Multiplier = 1/0.10 = 10
Total Credit = 1,000 × 10 = Rs. 10,000 crore

When LRR decreases from 20% to 10%, money multiplier increases from 5 to 10, and total credit creation doubles from Rs. 5,000 to Rs. 10,000 crore.