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When the Central Bank increases the Cash Reserve Ratio (CRR), it is most likely to:
- a)Increase the money supply
- b)Decrease the money supply
- c)Increase the reserve requirements of commercial banks
- d)Decrease the lending rates of commercial banks
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
When the Central Bank increases the Cash Reserve Ratio (CRR), it is mo...
When the Central Bank increases the Cash Reserve Ratio (CRR), it is most likely to increase the reserve requirements of commercial banks. The CRR is the percentage of deposits that banks must keep as reserves with the central bank. By increasing the CRR, the central bank requires banks to hold a larger proportion of their deposits as reserves, reducing the amount available for lending. This helps control excessive lending and the money supply.
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When the Central Bank increases the Cash Reserve Ratio (CRR), it is mo...
Explanation:
Increasing the Cash Reserve Ratio (CRR) is a monetary policy tool used by the Central Bank to control the money supply in the economy. When the Central Bank decides to increase the CRR, it is most likely to:
Decrease the money supply:
- By increasing the CRR, the Central Bank is essentially requiring commercial banks to hold a higher percentage of their deposits as reserves. This means that banks have less money available to lend out to consumers and businesses, leading to a decrease in the overall money supply in the economy.
Increase the reserve requirements of commercial banks:
- Commercial banks are required to keep a certain percentage of their deposits as reserves with the Central Bank. By increasing the CRR, the Central Bank is increasing this reserve requirement, which in turn reduces the amount of money that banks can lend out.
Therefore, when the Central Bank increases the Cash Reserve Ratio (CRR), it is most likely to increase the reserve requirements of commercial banks, leading to a decrease in the money supply available in the economy.
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When the Central Bank increases the Cash Reserve Ratio (CRR), it is most likely to:a)Increase the money supplyb)Decrease the money supplyc)Increase the reserve requirements of commercial banksd)Decrease the lending rates of commercial banksCorrect answer is option 'C'. Can you explain this answer?
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