✓ Board-verified
Economics · 2026 · 3 marks
CBSE 2026 · Region 2 · Set 1 · Q12
(A) “When initial deposits in the credit creation process remains same, the total amount of credit created rises as the value of money multiplier…
(A)
“When initial deposits in the credit creation process remains same, the total amount of credit created rises as the value of money multiplier increases.”
Defend or refute the above statement with the help of hypothetical numerical example.
OR
(B)
“The Central Bank maintains reserves of all commercial banks and use to settle interbank claims.”
Do you agree with the given statement ? Give valid explanation in support of your answer.
Marking-scheme solution
The given statement is defended.
| Case | Initial Deposits | Money Multiplier $\displaystyle \left(\dfrac{1}{RR}\right)$ | Credit Created (Initial Deposit x Money Multiplier) |
| I | $\displaystyle 1,000$ | $\displaystyle 4$ | $\displaystyle 1,000$ x $\displaystyle 4$ = ₹ $\displaystyle 4,000$ |
| II | $\displaystyle 1,000$ | $\displaystyle 5$ | $\displaystyle 1,000$ x $\displaystyle 5$ = ₹ $\displaystyle 5,000$ |
The above example depicts that there exists a direct relationship between money multiplier and the total amount of credit created by the commercial banks.
Yes. The Central Bank acts as the banker to banks and performs the clearing house function. Since, it maintains the cash reserves of all commercial banks it becomes convenient for the Central Bank to settle their mutual claims. The Central Bank adjusts these obligations by making entries without any physical transfer of cash. This process ensures smooth, quick and efficient settlement of such interbank transactions.
More from Money and Banking
- Read the following information carefully: “The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), recently increased the Repo Rate…2023
- Identify, which of the following is not a function of the Reserve Bank of India. (Choose the correct alternative)2023
- “An increase in the credit creation capacity of commercial banks has a direct impact on the money supply in an economy.” Discuss the given statement.2024
- The rate at which commercial banks borrow from the Reserve Bank of India to meet their long term requirements is known as. (Choose the correct…2023
- Suppose, for a hypothetical economy, Reserve Ratio (RR) decreases from 25% to 20%, the total deposits would to ₹, if primary deposits are ₹ 1,000.…2026
- Read the following statements carefully: Statement 1: Primary deposits are the cash deposits by general public with commercial banks. Statement 2:…2023
- releases data of money supply in India. (Choose the correct option to fill in the blank)2025
- Central Bank can decrease the money supply in the economy by. (Choose the correct option to fill in the blank)2025
CBSE Class 12 Economics past-paper question from the 2026 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.