11. What is legal reserve ratio? How does it affect the creation of money by banks?
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LRR (Legal Reserve Ratio) refers to that legal minimum fraction of deposits which the banks are mandate to keep as cash with themselves. ... Both CRR and SLR are fixed by the Central Bank, and both are a legal binding for the Commercial Banks. In this sense, both CRR and SLR are legal reserve ratios.
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It is legally compulsory for the banks to keep a certain minimum fraction of these deposits as cash. The fraction is called the Legal Reserve Ratio (LRR). The LRR is fixed by the Central Bank. Let us now explain the process, suppose the initial deposits in banks is Rs 1000 and the LRR is 10 percent
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