Question

"Lower the “Cash Reserve Ratio (CRR)”, higher will be credit
creation." Justify the given statement, using a hypothetical example.​

Answer 1

Explanation:

Money multiplier is the process by which the commercial banks create credit, based upon the reserve ratio and initial deposits. b. Reserve deposit ratio is the minimum reserves which a commercial bank must maintain as per the instructions of the Central Bank. Credit Creation = 1reservedratio1reservedratio Thus, credit creation is inversely related to the reserve deposit ratio. For Example: Suppose the Reserve Ratio is 0.2 and initial deposit is Rs 1000 crores. Total Credit Created = 1reservedratio1reservedratio x initital deposits = 10.210.2 x 1000 = Rs 5,000 crores. Now, suppose reserve ratio is increased to 0.5 Total Credit Created = 1reservedratio1reservedratio x initital deposits = 10.510.5 x 1000 = Rs 2,000 crores. Thus, on the basis of the above illustration we can say that there exists an inverse relation between reserve and credit creationRead more on Sarthaks.com - https://www.sarthaks.com/969122/a-define-money-multiplier

Answer 2

Answer:

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