BANKING AFFAIRS

Detailed explanation-1: -In contrast, a higher CRR or LRR will reduce the money multiplier effect and decrease the credit creation capability of commercial banks. For example, banks cannot create credit when the legal or cash reserve ratio is 100%.

Detailed explanation-2: -The lower the LRR, the greater the money multiplier effect and the greater the money creation. The money multiplier is a phenomenon that occurs in the economy when money is created in the form of credit. Based on the fractional reserve banking system, money is created in the market.

Detailed explanation-3: -Answer: Yes, there exists an inverse relation between Reserve Ratio and Credit Creation in the economy. From the above calculation, we can conclude that higher the reserve Ratio, lesser credit will be created by Commercial Banks in the economy.

Detailed explanation-4: -An increase in CRR, would mean that banks would be required to keep a greater portion in form of deposits with the central bank. This implies that the commercial banks are left with lesser amount of funds to lend out. Hence, the lending capacity of the banks reduces, leading to fall in the money supply.