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If the RBI raises the reserve ratio from 20 per cent to 25 per cent, the deposits that Rs 100 of reserves can support
Afall from Rs 500 to Rs 400
Brise from Rs 400 to Rs 500
Cstay at Rs 400
Drise to Rs 625
Answer & Solution
Correct answer: A. fall from Rs 500 to Rs 400
1. Total deposits supported = reserves ÷ reserve ratio.
2. At 20 per cent: 100 ÷ 0.20 = Rs 500 of deposits.
3. At 25 per cent: 100 ÷ 0.25 = **Rs 400**, so the ceiling falls.
4. Banks must call in loans to meet the higher requirement, so money supply contracts. A higher ratio can never raise the ceiling, which rules out the rising options.
_Source: NCERT Class 12 Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.3.2 Limits to Credit Creation and Money Multiplier_
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