What is the likely impact of an increase in the Time Deposit to Demand Deposit (TD/DD) ratio on the banking system and monetary expansion?

CA Foundation · Business Economics · PYQS · May 2025
What is the likely impact of an increase in the Time Deposit to Demand Deposit (TD/DD) ratio on the banking system and monetary expansion?
(A) A. It leads to higher availability of free reserves and consequent enlargement of volume of multiple deposit expansion and monetary expansion.
(B) B. It reduces the availability of free reserves, thereby restricting the process of monetary expansion.
(C) C. It has no impact on the banking system as time deposits and demand deposits are interchangeable.
(D) D. It directly reduces the money supply as time deposits are not considered part of the money supply.

Suggested Answer and Working Notes:

Correct Answer: Option (A)

A. It leads to higher availability of free reserves and consequent enlargement of volume of multiple deposit expansion and monetary expansion.

Topics: Money Market

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