CBSE Class 12 Economics HOTs Money And Banking

Question: Which of the following us not concerned with banking organization?
(a) Bank rate
(b) Fiscal deficit
(c) Credit creation
(d) Cash reserve ratio 

Answer: B

Question: Commercial banks create money by way of: 
(a) Fixed deposits
(b) Demand deposits
(c) Treasury bills
(d) Bill of exchange 

Answer: B

Question: Central Bank is an open bank of the country that:
(a)Controls the entire banking system of the country
(b)Issues currency
(c)Acts as a banker to the government
(d)All of these 

Answer: B

Question: Reserve reporate:
(a)Generates interest income
(b) is increased to control inflation
(c) is not a policy rate
(d) Both (a) and (b) 

Answer: D

Question: CRR in India is fixed by:
(a) The commercial banks
(b) the government
(c) the RBI
(d) the RBI and commercial banks 

Answer: C 

Question: As an advisor to the government central bank frames policies to regulate the:
(a) Money market
(b) Capital Market
(c) Financial and Capital market
(d) none of these 

Answer: A

Question: Formula to calculate money multiplier_________
(a) 1/CRR
(b) 1/SLR
(c) 1/CRR*1/SLR
(d) 1/SLR*time deposits  

Answer: D

Question: Open market operations as an instrument of credit control are performed by:
(a)The central bank of the country
(b)The commercial bank of the country
(c) Both (a) and (b)
(d) None of these  

Answer: A

Question: Credit cards issued by the banks are___________
(a) Encourage consumer spending
(b) Increase aggregate demand the economy
(c) Increase inaggregate supply
(d) both (a) and (b) 

Answer: D 

Question: Money which is accepted as a medium of exchange because of the trust between the payer and the payee is called:
(a) Full bodied money
(b) Credit money
(c) Fiat money
(d) Fiduciary money 

Answer: D

Question: Which of the following is typical character of the barter system?
(a) A common medium of exchange
(b) Double coincidence of wants
(c) A common unit of account
(d) A standard for deferred payments

Answer: B

Question: Supply of money is a:
(a) Flow variable
(b) Stock variable
(c) Real flow
(d) None of these 

Answer: B

Question: Money that is issued by the authority of the government is called:
(a) Full bodied money
(b) Credit money
(c) Fiat money
(d) Fiduciary money 

Answer: C

Question: Money is defined as:
(a) Commonly accepted measure of value
(b) A store of value
(c) A standard of deferred payments
(d) All of these 

Answer: D

Question: Demand deposit include
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits 

Answer: B

Question: Which of the following systems is followed by reserve bank of India for issuing currency?
(a) Proportionate system
(b) Simple deposit system
(c) Minimum reserve system
(d) Fixed fiduciary issue system 

Answer: C

Question: Component of money supply
(a) Coins
(b) Paper currency
(c) Demand deposits
(d) All of these 

Answer: D

Question: High powered money includes:
(a) Currency and demand deposits
(b) Demand deposits and saving deposits
(c) Currency held by public and cash reserves with banks
(d) None of these 

Answer: D

Question: The maximum limit to accept payments in coins
(a) ₹ 500
(b) ₹ 1000
(c) ₹ 250
(d) None of these 

Answer: D 

Assertion (A) and Reason (R) type questions:  

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below. 
Assertion (A): To boost the falling demand in the economy. Reserve bank of India recently reduced repo rate and bank rate.
Reason (R): Decrease in repo rate and bank rate causes decreases in the rate of interest which leads to rise demand of credit because of which more money flows into the economy, Purchasing power of people increases. Thus aggregate demand rises and deficient demand is correcte(d)
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: A

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below. 
Assertion (A): There are two components of money supply currency held by the public and the demand deposits held by the commercial banks.
Reason (R): Money supply is a stock variable and refers to the stock of money held by the public in spendable forms i.e money supply refers to the stock of money in circulation in an economy.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: A

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below. 
Assertion (A): Higher the legal reserve ratio lowers the credit creation and lower the reserve ratio higher will be the credit creation.
Reason (R): Money/Deposit multiplier is a multiple by which total deposits increases due to primary deposits. It refers to the amount by which the initial deposits multiply into a large amount of the deposits.
Money multiplier = 1/LRR/RDR (LRR= Legal reserve ratio, Reserve Deposit ratio) Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: A

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below.
Assertion (A): Anything will be called money if the law of country proclaims it to be money. It will be commonly accepted measure of value as it will be endowed with legal tender power (Limited and unlimited).Thus “money is what the law says it is”Reason (R): Limited legal tender money can be accepted up to a certain limit. For example in India, coins up to Rs1000 only (as per coinage bill, August 2011) can be accepted legally in payment. All currency notes have unlimited legal tender.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: A
 

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below.
Assertion (A): Money supply is a flow concept.
Reason (R): Money Supply always measured at a particular point of time Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: C

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below.
Assertion (A): Central bank of a country has the exclusive right (monopoly right) of issuing currency notes (except one rupee note/coin) and central bank has the complete power to the money supply and credit in the country.
Reason (R): Central bank can use only quantitative method to control credit.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: B

Question: Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below.
Assertion (A): The reserve bank of India had in March 2020 offered a three months moratorium on loans enabling borrowers to defer repayment on EMI and other loans.
Reason (R): The loan moratorium was aimed at providing borrowers relief aimed the economic impact of the covid-19 pandemi(c)
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: A

 Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below.
Assertion (A): Currency held by public is a monetary liability of central bank
Reason (R): Central bank controls credit, whereas commercial banks create credit with currency held by publi(c)
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: D

 Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below. 
Assertion (A): Central Bank is the Lender of the last Resort.
Reason (R): It is ready to lend to banks, when bank faced severe crises. If Central bank refuses,there is no option for the banks but to shutdown.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: B

 Read the following statements Assertion (A) and Reason (R). Choose the correct alternatives given below.
Assertion (A): Central bank acts as a banker to the government as a custodian of cash reserves.
Reason (R): The central bank acts as a clearing house for transfer and settlement of mutual claims of commercial banks.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the not correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true 

Answer: B 

Read the following statements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion(A): Anything will be called money, if the law of country proclaims it to be money.
It will be commonly accepted measure of value as it will be endowed with legal tender power (limited and unlimited). Thus “money is what the law says it is”.
Reason(R): limited legal transfer money can be accepted up to a certain maximum limit.
For example, in India, coins up to rs1000 only (as per coinage bill, august 2011) can be accepted legally in payment. All currency notes have unlimited legal tender.
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

Read the following statements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion(A) There are two components of money supply, currency held by the public and net demand deposits held by the commercial banks.
Reason(R) Money supply is a stock variable and refers to the stock of money held by public in spendable form i.e., money supply refers to the stock of money in circulation in an economy.
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

 Read the following statements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion (A)Money is also called bearer of options
Reason(R) Money commonly accepted measure of value money helps in buying selling of goods and services
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

 Read the following statements – Assertion (A) and Reason (R). (Choose one of the correctalternatives given below)
Assertion(A) higher the legal reserve ratio, lower will be the credit creation and lower the legal reserve ratio, higher will be the credit creation.
Reason(R) money/ deposit multiplier in a multiple by which total deposits increase due to primary deposit. It refers to the amount by which the initial deposits multiply into a larger amount of final deposits.
Money multiplier= 1/(LRR/RDR) (LRR=legal reserve ratio RDR=reserve deposits ratio)
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

 Read the following statements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion(A) Money is an asset and can be stored in future money helps people to transfer their purchasing power from present use to future use.
Reason (R) Money is a way to store wealth because it is commonly accepted measure of value and easy to store money
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

Read the following s tatements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion(A) A margin is the difference between market value of the security offered by the borrower against the loan and the amount of loan granted Reason(R) The discount fixed by RBI on the assets mortgaged as security to the commercial bank example: margin requirement is 20% the bank is allowed to give loan up to 80% 
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

 Read the following statements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion(A) to boost the falling demand in the economy, reserve bank of India recently reduced repo rate and bank rate.
Reason(R) decrease in repo rate and bank rate causes decrease in rate of interest which leads to rise in demand of credit because in the rate of interest which leads to rise in demand of credit because of which more money flows into the system, purchasing power of people increases. Thus aggregate demand rises and deficient demand is correcte(d)
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true  

Answer: A

 Read the following statements – Assertion (A) and Reason (R). (Choose one of the correct alternatives given below)
Assertion(A) legal reserve ratio determines the limit to create credit by the commercial banks Reason(R) the credit created by commercial banks are called derivative deposits a ban cannot lead more  than primary deposits
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) are true and (R) is not the correct explanation of (A)
(c) (A) is true but (R) is false
(d) (A) is false but (R) is true 

Answer: A

Question: What do you mean by double coincidence of wants?
Answer: Double coincidence of wants means that goods in possession of two different individual are needed by each other at the same time.

Question: Define margin requirement.
Ans. Margin requirements refer to the difference between market value of the security offered for loans and the amount banks of loans offered by the commercial banks.

Question: How is quantitative credit control different from qualitative credit control?
Answer: Quantitative credit control refers to overall credit control in the economy, affecting all sectors of the economy equally and without discrimination. Qualitative credit control refers to selective credit control that focuses on allocation of credit to different sector of economy. Flow of credit is encouraged to the priority sectors, while it is discouraged to the non-priority sectors.

Question: How improvement in banking habits of the people pushes up credit availability from the commercial bank?
Answer: When banking habits of the people improve, they star holding less money as cash-in-hand. Instead more and more money is deposited with the commercial bank. Accordingly, cash reserves of the commercial bank start rising. Higher cash reserve of the bank enable them to deposits more funds with the RBI as CRR – deposits. If CRR remains constant higher
CRR- deposits with the RBI gives the commercial bank the legal authority to create more credit by way of loans/credit. Accordingly, availability of credit from the commercial bank is increased.

Question: Define the term Money Supply & state its constituents.
Answer: It refers to the total stock of money in an economy at any point of time, held by the general public i.e. the private individuals and business firms (money is in disposable form). In other words, it is the amount of money which is in circulation in an economy at a given point of time. The two constituents of money supply are currency held by the general public & demand deposits of general public held by the Commercial Banks. Thus, M1 = C + DD+O

Question: How can 'Jan-Dhan Yojana' used as an instrument to increase supply of money by the commercial banks?
Answer: A large section of the population in India does not have their bank accounts. 'Jan- Dhan Yojana' prompts people to open their bank accounts. When more and more accounts are open then some of the cash balances with the people (or idle cash lying with the people) are bound to reach the banking system as cash deposits or primary deposits. This increase enables commercial banks to increase their cash reserves with the central banks.
If /\ CR (additional cash reserves with RBI)= Rs10,000 and if CRR=4% then the additional demand deposit the bank can create = 1/4% * 10,000 = Rs 2,50,000. This is how 'Jan-Dhan Yojana' may be used as an instrument to increase the supply of money by the commercial banks.

Question: Why has the government in India failed to combat inflation even when a series of monetary measures are available in the textbook of macroeconomics?
Answer: Monetary measures of combating/ controlling inflation focus largely on moderating/ lowering the demand for goods and services by making the availability of credit costlier and difficult. It does not address supply side of the problem. While the fact of the matter is that in India inflation has often been triggered by the low market supplies. Unless supplies are boosted (particularly the supply of farm output) we shall continue to wrestle with inflation without training it.

Question: What is Money?
Answer: Money is anything that has the general acceptability as a common medium of exchange & as a common measure of the value of the commodities.

Question: What is Barter system?
Answer: It refers to the exchange of goods for goods. In other words, it refers to the direct exchange of goods & services with another.

Question: How in your opinion, credit creation by the commercial banks accelerates the pace of economic growth? Write two observations.
Answer: Following observations may be noted in this regard:
Observation 1: Credit creation accelerates the process of growth by expanding the availability of credit for purpose of investment.
Observation 2: Credit creation contribute to the process of growth by expanding size of the market (or aggregate demand), as the availability of credit for the purchase of consumer durables increases.

LONG ANSWER TYPE QUESTIONS

Question: What are the different types of deposits held by the Commercial Banks?
Answer: a) Current account deposits or Chequeable deposits which are payable on cheques & the depositors can withdraw their deposits whenever they like. This account is generally maintained by the traders for day to day transactions. The banks pay no interest on this deposit.
b) Saving Account deposits are those deposits on which the bank pay interest which is less than the interest paid on the fixed deposits. The bank imposes some restrictions on their withdrawal. The purpose of this deposit is to encourage & mobilize the small savings.
c) Fixed or Time Deposits refers to the deposits which are accepted for the specified period & which are not payable on demand before the expiry of the period. The bank pay relatively high rate of interest on this deposit.
The variant of this deposit is Recurring Deposit whose purpose is to encourage regular savings by the people. This deposit is based upon the installment payment for a fixed period of time on which the interest is paid after maturity of the account.
Define the term Central Bank & explain its functions.
A Central Bank is an apex institution which directs, control, regulates & supervises the monetary system of a country. Central bank is the monetary authority which leads all banking & non – banking institutions. The name of the Central bank in India is Reserve Bank of India (RBI) which is established in 1935.The RBI occupies the highest position in the money & capital market.
Functions
1. It has the monopoly of issuing currency notes. It has the exclusive right to issue the currency notes in the country which leads to the uniformity of the currency throughout the nation. Moreover, this enables it to have a total control over the total money supply of the country which leads to the strengthening of the monetary policy during the crisis time.
2. It act as a banker of the govt. as it accepts the deposits of the govt. & makes payment on behalf of the it, gives financial advices, & advances the loans in the crisis times, remit the surplus funds of Govt., purchase & sell Govt. securities on its behalf.
3. It acts as a banker's bank in the form of lender of last resort, facilitate clearing house facilities & remit the surplus funds, supervise the banking activities & regulates creditdeposits of the Banks. Since RBI is the guardian of all the banks, the banks can get the benefit of easy & early credit during their financial requirements. As a facilitator of clearing, the RBI makes early settlement of financial claims & debts of the banks. As a result, the banks don't face any problem of cash liquidity, & thus they need not to remain depended on the bank credit or capital funds of the banks. As a regulator & supervisor, the banks are not in the position of any malpractice & the entire banking system remains transparent & accountable to public.
4. It acts as a custodian of gold reserves & the nation's stock of foreign exchange reserve.
The purchase & sale of Gold & foreign exchange at the global level is done by RBI only. As a custodian, RBI is responsible for maintaining the stock of gold & forex reserves & the determination of their prices.
5. It acts as a controller of credit which is one of the most important functions. Since it is an apex institution, therefore can play an effective role to combat or correct the inflationary or deflationary pressures of an economy. The RBI controls credit by using Quantitative(General) & Qualitative(Selective) credit control methods. The tools under quantitative methods are Bank/Repo rate, Reserve repo rate, CRR & SLR, Open market operations. Under selective methods, RBI use Margin, credit quota & rationing, moral suasion & direct action etc.
6. It promote the economic growth & development of the country by erecting the financial institutions in the rural areas, providing direct loans to the farmers, framing the policies in favour of trade & industry, collect the economic information’s & publish through its various journals which further helps the govt. & other institutions to adopt the correct policies etc.

Question: Explain how does a Commercial Bank creates credit(money supply).
Answer: Credit creation by the banks is determined by (i) the amount of initial deposits and ii) the legal reserve ratio (LRR). It is assumed that all the money that goes out of banks is redeposit into the banks, and LRR consists of CRR & SLR.
A Commercial Bank accepts deposits from general public & create a primary account deposit. This creates liability for the bank & asset for the depositor. It is also referred to as active deposit. From the active deposits the banks deduct the legal reserves to be kept in
Central Bank (RBI), & the rest (excess reserves) are used in loans & investment. When a bank give loans & advances, it creates another deposit known as derivative deposits or secondary account deposits on the name of debtor. This leads to creation of new primary account, & thus the new primary deposits keeps on increasing until the credit multiplier stops working. Greater the LRR, smaller the amount of total final deposits, & vice versa.
An Illustration to explain the process of credit creation:
Let the LRR be 20% and there is a Fresh/Primary/Initial/Deposit Account of Rs 10000. The banks keep 20% ie Rs 2000 as cash and lend the remaining Rs 8000 to a borrower by opening a new account, called as Loan/Secondary/Derived Account.
Here we assume that all the banking transactions will be through monetary instruments viz cheques etc.
As assumed, the amount of Rs 8000 will come back to the banks as fresh deposit from which once again the bank will keep 20% ie Rs.1600 as LRR and rest Rs 6400 will be lend to some other borrower. The bank now creates another secondary account which will once again become a primary account. This process continues and the money goes on multiplying till the sum of LRR and the fresh deposit amount is same or the new deposit becomes nil.
Finally, when we add the total money creation, we get Rs 50000 as the total deposit creation.
Total credit creation = Initial deposit X 1/LRR = 10000 X 1/20% = 10000 X 100/20 = Rs 50000

Question: Define the terms LRR, CRR, SLR, Repo & Reverse Repo rate, Credit Multiplier. Legal Reserve Ratio: It refers to the minimum portion of total net demand & time deposits of Commercial Banks which have to be maintained with Central Bank & themselves as cash liquid assets. There are two legal reserves viz. CRR & SLR.
Answer: Cash Liquidity Ratio: It refers to that minimum portion of total net deposits of Commercial
Banks which have to be maintained with Central Bank. During inflation or deflation, the
CRR is regulated by RBI to control inflation or deflation. During inflation, CRR is increased to restrict the credit by making it dearer, while it is reduced during deflation to expand the money supply in the economy by making it cheaper.
Statutory Liquidity Ratio: It refers to that portion of total deposits which have to be maintained by the Banks themselves in the form of liquid cash assets against the securities of Govt. & RBI. Repo rate ie Repurchase rate of interest refers to the interest paid by the Commercial Banks to RBI against the loans & advances taken by them from RBI to meet the short term needs. By changing Repo rate, RBI can regulate the money supply. It is different to Bank Rate in a way that Bank rate is charged against the loans taken by commercial banks for long term needs.
Reverse Repo Rate refers to the interest received by the Commercial Banks from the Central banks against the parking of funds by the commercial banks. By increasing RRR, the RBI can encourage the Commercial Banks to park more funds so as to restrict the money supply in the economy. By reducing RRR, the RBI discourages the parking of funds which helps to induce more credit in the economy to resolve the issue of deflation.
Credit Multiplier refers to the amount by which the initial deposit multiplies into a larger amount of final deposits. It is equal to 1/LRR. Thus, credit multiplier is inverse to LRR.