Money Multiplier
Money is primarily used to quantitatively measure the value of goods or services and supply of money plays an important role in the determination of inflation and interest rates. As the name suggests, money multiplier means ‘some’ supply of money creates a multiplier effect. Let’s see it in detail. Now let’s say there is a country called “Gokul Dham” and this country has infinite banks and infinite population but one central bank and the central bank has deposited Rs 100 in one bank named Bank#1. We know that all the deposits in the bank are the bank's liability since they are obliged to give it back to the depositors at some point in time and loans are the bank's asset. Let’s consider for the sake of understanding that the Cash Reserve Ratio is 10%. Cash Reserve ratio (CRR) is the proportion of money that banks are asked by the RBI to keep with themselves i.e they have to maintain some cash reserve with themselves and can’t loan all the money they have. Bank#1 can now loan Rs ...