Assume that the value of the cash reserve ratio is 25%. What will be the value of money multiplier?

The correct answer is 4.

To solve this, we use the formula for the Money Multiplier:

\text{Money Multiplier}=\frac{1}{\text{Cash Reserve Ratio (CRR)}}

The Cash Reserve Ratio (CRR) is the fraction of deposits that commercial banks are required to keep as reserves and cannot lend out. It directly controls how many times the banking system can multiply the initial deposit.

Step 1: Identify the given value.
Cash Reserve Ratio (CRR) = 25% = 0.25

Step 2: Apply the Money Multiplier formula.

\text{Money Multiplier}=\frac{1}{0.25}

Step 3: Calculate the result.

\text{Money Multiplier}=\frac{1}{0.25}=4

Intuitive Understanding:
If CRR = 25%, it means for every ₹100 deposited, a bank keeps ₹25 as reserve and lends out ₹75. That ₹75 gets deposited in another bank, which keeps ₹18.75 and lends ₹56.25 — and so on. This chain of deposits and lending continues, and when you add up all the money created through this process, the total is exactly 4 times the original deposit.

For example, if the initial deposit is ₹1,000:
Total money created = ₹1,000 × 4 = ₹4,000

Therefore, the value of the Money Multiplier = 4.