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The fraction of deposits kept as Cash Reserves by the commercial banks are also called as
- a)LRR
- b)CRR
- c)SLR
- d)PLR
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
The fraction of deposits kept as Cash Reserves by the commercial banks...
Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank.
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Community Answer
The fraction of deposits kept as Cash Reserves by the commercial banks...
The answer is option 'A', i.e., LRR which stands for Legal Reserve Ratio. Let's understand the concept of LRR in detail.
Legal Reserve Ratio (LRR)
Legal Reserve Ratio (LRR) is the minimum fraction of deposits that commercial banks are required to keep as cash reserves with the central bank of the country. The central bank sets the LRR, and it varies from country to country. The central bank may increase or decrease the LRR to control the money supply in the economy.
The Purpose of LRR
The primary purpose of LRR is to ensure the safety and stability of the banking system and the economy. By keeping a certain percentage of deposits as cash reserves, banks can meet the demand of depositors for withdrawals and also maintain their solvency.
Relation between LRR and Money Supply
The LRR has a direct impact on the money supply in the economy. When the central bank increases the LRR, banks have to keep a higher percentage of deposits as cash reserves, which reduces the amount of money available for lending. This, in turn, reduces the money supply in the economy. On the other hand, when the central bank decreases the LRR, banks have to keep a lower percentage of deposits as cash reserves, which increases the amount of money available for lending, thereby increasing the money supply in the economy.
Conclusion
In conclusion, LRR is the fraction of deposits that commercial banks are required to keep as cash reserves with the central bank. It is an essential tool used by the central bank to regulate the money supply in the economy.
Legal Reserve Ratio (LRR)
Legal Reserve Ratio (LRR) is the minimum fraction of deposits that commercial banks are required to keep as cash reserves with the central bank of the country. The central bank sets the LRR, and it varies from country to country. The central bank may increase or decrease the LRR to control the money supply in the economy.
The Purpose of LRR
The primary purpose of LRR is to ensure the safety and stability of the banking system and the economy. By keeping a certain percentage of deposits as cash reserves, banks can meet the demand of depositors for withdrawals and also maintain their solvency.
Relation between LRR and Money Supply
The LRR has a direct impact on the money supply in the economy. When the central bank increases the LRR, banks have to keep a higher percentage of deposits as cash reserves, which reduces the amount of money available for lending. This, in turn, reduces the money supply in the economy. On the other hand, when the central bank decreases the LRR, banks have to keep a lower percentage of deposits as cash reserves, which increases the amount of money available for lending, thereby increasing the money supply in the economy.
Conclusion
In conclusion, LRR is the fraction of deposits that commercial banks are required to keep as cash reserves with the central bank. It is an essential tool used by the central bank to regulate the money supply in the economy.
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The fraction of deposits kept as Cash Reserves by the commercial banks are also called asa)LRRb)CRRc)SLRd)PLRCorrect answer is option 'A'. Can you explain this answer?
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