Suppose an initial cash deposit of INR 100 crores has been made in a commercial bank where a total credit of INR 500 crores has been created in the…

Option 1: 5% -> If RRR is 5%, money multiplier would be 1/0.05 = 20, creating INR 2000 crores, not 500.

Option 2: 10% -> If RRR is 10%, money multiplier would be 1/0.10 = 10, creating INR 1000 crores, not 500.

Option 3: 20% -> If RRR is 20%, money multiplier would be 1/0.20 = 5, creating INR 500 crores, which matches.

Option 4: 25% -> If RRR is 25%, money multiplier would be 1/0.25 = 4, creating INR 400 crores, not 500.

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Hence, Option 3: 20% -> The money multiplier formula is: Money Multiplier = Total Credit / Initial Deposit = 500/100 = 5. The required reserve ratio (RRR) is calculated as: RRR = 1/Money Multiplier = 1/5 = 0.20 or 20%. This means banks must keep 20% of deposits as reserves and can lend out the remaining 80%, which creates a multiplier effect of 5 in the economy. -> correct