Question

Explain using a numerical example, how can increase in reserve deposit ratio affects the money creation power of banking system?

Answer 1

Effect of Decrease in Cash Reserve Ratio. Effect on interest rates: When the cash reserve ratio is decreased by the RBI, banks will have more money to invest in other businesses since the amount of funds that needs to be kept with the RBI is low.

Answer 2

Explanation:

➡️The credit creation capacity depends on the rate of increase or decrease in CRR by the central bank. (b) CRR: ADVERTISEMENTS: Refers to reserve ratio of cash that need to be kept with the central bank by commercial banks.

➡️How Banks Create Money example?

Banks create money during their normal operations of accepting deposits and making loans. In this example we'll use M1 as our definition of money. (M1 = currency in our pockets and balances in our checking accounts.) When a bank makes a loan it creates money.