What is Currency Deposit Ratio (CDR)?
-
- Ratio of money held by the public in currency to that of money held in bank deposits
- Ratio of money held by the public in bank deposits to that of money held by public in currency
- Ratio of money held in demand drafts to that of money held in treasury bonds
- None of the above
Correct Answer: Ratio of money held by the public in currency to that of money held in bank deposits
Answer Explanation
Currency Deposit Ratios (CDRs) are calculated as the ratio between the money held by the public in physical currency (coins and paper notes) and the money held by the public in bank deposits (demand deposits and time deposits). The ratio reflects the preference of individuals and businesses for holding liquid cash over holding bank accounts.
A CDR measures the proportion of money held in currency relative to money held in bank deposits. It provides insight into the public’s desire for cash and willingness to maintain funds in the banking system.
A high CDR indicates that a significant portion of the public’s money is held as physical currency rather than deposited in banks. This may indicate a lower level of trust in the banking system, concerns about liquidity, or preferences for immediate spending. In contrast, a low CDR indicates that a large percentage of money is being held in bank deposits, indicating confidence in the system and a preference for earning interest on their deposits.
Why the other options are not correct
b. Ratio of money held by the public in bank deposits to that of money held by public in currency
This option is not correct because it reverses the components of the CDR. The correct definition of CDR involves the ratio of money held in currency to money held in bank deposits, not the other way around. CDRs describe how the public prefers currency over bank deposits.
c. Ratio of money held in demand drafts to that of money held in treasury bonds
The option above is incorrect since it introduces unrelated elements into the definition of CDR. Treasury bonds and demand drafts are distinct financial instruments and are not included in the calculation of CDR. In CDR, the focus is exclusively on the relationship between physical currency and bank deposits.
d. None of the above
Option (a) “Ratio of money held by the public in currency to that of money held in bank deposits” is the correct answer. It has been explained as the correct answer based on its alignment with the concept of CDR. It has been discussed that the other options do not accurately reflect the definition of CDR.
Conclusion
Accordingly, the Currency Deposit Ratio (CDR) highlights the proportion of money held by the public in cash as compared to bank deposits. Using this ratio, we can gain insight into consumer behavior, liquidity preferences, and trust in the banking system. In assessing the monetary landscape, option (a) accurately reflects the definition of CDR.
For policymakers, economists, and financial institutions, the CDR provides valuable insight into the dynamics between physical currency and bank deposits.
The derivative deposit created by a bank results in-
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
- AT&T Competitors – Top 10 Major Competitors of AT&T | Competitors Analysis - January 2, 2024
- ASOS Competitors – Top 10 Major Competitors of ASOS | Competitors Analysis - January 1, 2024
- ASML Competitors – Top 10 Major Competitors of ASML | Competitors Analysis - January 1, 2024