If Imtiaz transfers a Rs1,000 demand deposit from Bank A to Bank B, and both operate on a 10 percent reserve requirement, what is the potential total change in the money supply resulting from this transaction?
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Answer: D. Rs 0
Explanation
Transferring an existing deposit between two banks simply reallocates existing reserves. Both banks operate under identical reserve requirements, meaning no excess reserves are newly created. Total deposits and currency across the entire banking system remain completely unchanged. Demand deposits form a major component of the broader money supply measurements. Interbank transfers move reserve balances from one institution to another instantly. Net monetary expansion requires new loans funded by excess reserves in the system.
Daily banking transactions constantly shift funds between institutions without altering money supply. Central banks monitor aggregate monetary aggregates rather than individual bank deposit movements. Understanding deposit transfers clarifies how fractional reserve banking expands credit. Ten thousand rupees represents an incorrect calculation disconnected from reserve math. One thousand rupees assumes new money is created from an internal asset transfer. Other non-zero figures fail to recognize that reserve-neutral transfers yield zero net change.
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