ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If there is an increase in the cash reserve ratio, a bank will a low lending capacity in terms of funds. Hence, banks will ask more people to open deposits in their bank accounts. Banks will also raise the interest rate and this step will discourage borrowers from applying for loans due to the increased interest rate.

Detailed explanation-2: -Banks will have to maintain more money as cash or deposits with RBI, hence will have less money to lend or invest, thus increasing the liquidity in the market.

Detailed explanation-3: -The RBI’s increase in the cash reserve ratio (CRR) will result in: Reduce the amount of money in circulation in the economy.

Detailed explanation-4: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.

Detailed explanation-5: -Definition: Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.