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“The statutory… (Class 12 Economics SQP 2025-26, Q12A)

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EconomicsCBSE Class 12 · Sample paper, session 2025-26 · 3 marks · Short answer

CBSE Class 12 Economics sample paper 2025-26: question 12(A)

From the official CBSE sample question paper for 2025-26, section A, question 12(A), for 3 marks. Try it first; the hints and our step-by-step solution are below.

Q12(A) · 3 marks · Short answerMoney and Banking

“The statutory requirement of the Reserve Ratio (RR) acts as a limit to the amount of credit that banks can create.”
Justify the given statement with the valid explanation.

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2025-26.

Hints

Open one hint at a time and try again before the next.

Hint 1

What happens to the part of each deposit that banks cannot lend?

Hint 2

Money multiplier = 1/RR.

Step-by-step solution

Each step shows the marks it earns, as an examiner would award them. Checked by an independent re-solve from the question paper.

  1. The reserve ratio is the fraction of deposits that every commercial bank must, by law, keep as reserves (for example, CRR with the central bank); only the rest can be lent.

    1 mark

  2. It is fixed by the central bank to prevent over-lending and is binding on all banks.

    1 mark

  3. Each time a deposit is created, part of it must be held back as reserves, so the chain of loans and new deposits gets smaller at every round. Total credit = Initial deposit × 1/RR, so a higher reserve ratio means less credit can be created. Hence the reserve ratio sets the limit to credit creation.

    1 mark

Answer: Banks must legally keep a fixed share of deposits as reserves, so only the rest can be lent; total credit = initial deposit × 1/RR, which limits credit creation.

Where the marks are

  • Explanation of reserve ratio as a legal limit (marked as a whole, 3)

Revise the chapter

  • Chapter: Money and Banking (notes, formulas, where marks are lost and every past question)
Practise this chapterBoard-style questions from Money and Banking, one at a time, marked against the answer key and marking points.Back to the full paperSample paper 2025-26: every question, by section.

The question is transcribed from the official paper; figures are described in words. The solution, hints and chapter tag are ours. Spotted an error? Write tosupport@questionbuddy.in.