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Difficulty: MediumCommercial Banks: Functions, Services, and Credit Creation

In a commercial banking system, the Central Bank mandates a Cash Reserve Ratio of 15%15\%. If the banking system generates a total deposit expansion of N6,000,000\text{N}6,000,000 through the credit creation process, what is the initial cash deposit (in Naira) made into the system?

Answer: 900000 Naira

Answer

The initial cash deposit required to generate a total deposit expansion of 6,000,000 Naira at a 15% Cash Reserve Ratio is 900,000 Naira.
The relationship between initial deposit (PP), total deposit expansion (TT), and Cash Reserve Ratio (CRRCRR) is given by T=PCRRT = \frac{P}{CRR}. Rearranging this equation to solve for the initial deposit yields P=T×CRRP = T \times CRR. Substituting the given values gives P=N6,000,000×0.15=N900,000P = \text{N}6,000,000 \times 0.15 = \text{N}900,000.

Step-by-Step Solution

1
Identify the total deposit expansion formula
Total Deposit Expansion = Initial Cash Deposit / Cash Reserve Ratio (CRR)
The deposit multiplier is the inverse of the Cash Reserve Ratio, meaning total credit created expands proportionately to the primary cash deposit.
2
Substitute the provided figures into the equation
6,000,000 = Initial Cash Deposit / 0.15
The Cash Reserve Ratio of 15% is expressed as 0.15 in decimal form.
3
Rearrange the equation to solve for the initial cash deposit
Initial Cash Deposit = 6,000,000 * 0.15 = 900,000 Naira
Multiplying the total credit expansion by the reserve requirement yields the original primary deposit.

Key Concept

Credit Multiplier and Primary Cash Deposit Calculation
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Topics

Commercial Banks: Functions, Services, and Credit Creation

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