CBSE Class 12-commerce Answered

To derive the multiplier:

Money Supply = Currency + Demand Deposits

M = C + DD = (1+ cdr) DD, where cdr = C/DD

Assume treasury deposit of government is equal to 0.

Therefore,

High Powered Money = Currency held by public + Reserves of commercial banks

Where Reserves of commercial banks are vault cash and bank deposits with RBI.

M= C + R = cdr.DD + rdr.DD

 = (cdr +rdr)DD

Money Multiplier = M/H

 = (1+cdr)DD/(cdr +rdr)DD

 = 1 + cdr/cdr +rdr

Value of multiplier is greater than one because rdr is less than one.