What is legal reserve ratio? How does it influence the process of
credit creation?
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The central bank sets the statutory reserve amount. Cash Reserve Ratio (CRR)-It applies to Corporate Banks' cash deposits as a measure of their balances with the Central Bank.
Explanation:
Legal Reserve Ratio:- This is the statutory liquidity ratio that the financial institutions legally need to hold with ourselves and with the banking system.
As such, two ratios play an essential part in determining the cash multiplier share price.
They are:
(a) Cash Reserve Ratio:- It states that the minimum percentage of overall cheques issued by a bank, that must be kept with both the banking system.
(b) Statutory Liquidity Ratio:-This refers to a minimum percentage of net household consumption and time commitments that investment banks need to hold with ourselves.
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