If a commercial bank receives an initial cash deposit of \text{N}10,000 and the Cash Reser… — JAMB UTME

If a commercial bank receives an initial cash deposit of $\text{N}10,000$ and the Cash Reserve Ratio set by the Central Bank is $10\%$ , what is the total credit that can be expanded across the banking system?

A
$\text{N}1,000$
$\text{N}100,000$ Cevap
C
$\text{N}9,000$
D
$\text{N}10,000$

Cevap

The total credit that can be expanded across the banking system is

\text{N}100,000

Total credit expansion by commercial banks is calculated using the formula

\text{Total Expansion} = \text{Initial Deposit} \times \frac{1}{\text{Cash Reserve Ratio}}

. With an initial deposit of

\text{N}10,000

and a cash reserve ratio of

10\%

(

0.10

), the multiplier is

1 / 0.10 = 10

, resulting in a total credit capacity of

10,000 \times 10 = \text{N}100,000

Adım Adım Çözüm

Calculate the credit multiplier using the Cash Reserve Ratio (CRR).

\text{Credit Multiplier} = \frac{1}{\text{CRR}} = \frac{1}{0.10} = 10

The credit multiplier reflects the maximum expansion factor for commercial bank deposits relative to reserves.

Multiply the initial cash deposit by the credit multiplier to find total credit expansion.

\text{Total Credit Expansion} = 10,000 \times 10 = \text{N}100,000

Applying the multiplier formula calculates the theoretical maximum credit created across the banking network.

Anahtar Kavram

Credit Creation and the Money Multiplier

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