A commercial bank receives a fresh cash deposit of ₦120,000. If the central bank mandates … — JAMB UTME

A commercial bank receives a fresh cash deposit of $₦120,000$ . If the central bank mandates a legal cash reserve ratio of $15\%$ and commercial banks voluntarily hold an additional excess cash reserve ratio of $5\%$ , what is the total amount of net credit created by the banking system?

$₦480,000$ Answer
B
$₦600,000$
C
$₦680,000$
D
$₦24,000$

Answer

The total amount of net credit created by the banking system is

₦480,000

The total reserve ratio is the sum of legal reserves (

15\%

) and voluntary excess reserves (

5\%

), giving

20\%

(

0.20

). The credit multiplier is

\frac{1}{0.20} = 5

. Total deposit expansion equals

₦120,000 \times 5 = ₦600,000

. Subtracting the initial deposit of

₦120,000

yields a net credit creation of

₦480,000

Step-by-Step Solution

Calculate the effective total cash reserve ratio

Effective Reserve Ratio =

15\% + 5\% = 20\% = 0.20

Both legal required reserves and voluntary excess reserves leak from loanable funds, so they must be combined.

Calculate the credit expansion multiplier

Credit Multiplier (

K

) =

\frac{1}{\text{Total Reserve Ratio}} = \frac{1}{0.20} = 5

The deposit expansion multiplier is the reciprocal of the total reserve ratio.

Determine total deposit expansion created by the banking system

Total Deposit Expansion = Initial Primary Deposit

\times K = ₦120,000 \times 5 = ₦600,000

The banking system expands total secondary deposits up to five times the primary deposit.

Calculate net credit created

Net Credit Created = Total Deposit Expansion - Initial Primary Deposit = ₦600,000 - ₦120,000 = ₦480,000

Net credit creation measures only the new money created through lending, excluding the initial primary cash injection.

Key Concept

Net Credit Creation with Excess Cash Reserves

Estimated Time:2m 0s

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