Q.A bank receives an initial deposit of ₹2,000 and the Cash Reserve Ratio is 25%. Calculate the total deposits (total money) created by the banking system.

Because banks keep only a fraction of deposits as reserves and lend the rest, an initial deposit multiplies into a much larger total through successive rounds of lending and re-depositing.

Total deposits $= 2{,}000 \times (1/0.25) = 2{,}000 \times 4 = 8{,}000$.

Given: initial deposit $D = ₹2{,}000$; CRR $r = 25\% = 0.25$.

Step 1 — Find the credit multiplier.

Step 2 — Total deposits created.

Verification (round-by-round sum). Deposits form a geometric series with first term 2,000 and common ratio $(1-r) = 0.75$: sum $= 2{,}000 / (1 - 0.75) = 2{,}000 / 0.25 = ₹8{,}000$ — matching.

Multiplying by the reserve ratio (₹2,000 × 0.25) instead of dividing by it is the classic error. The multiplier is $1/r$, so a smaller CRR gives more credit creation. Also, note the question asks for total deposits (₹8,000), not the newly created credit alone (which would be ₹8,000 − ₹2,000 = ₹6,000).