ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -For this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in turn, slows down investment and reduces the supply of money in the economy.

Detailed explanation-2: -Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.

Detailed explanation-3: -An increase in the reserve ratio will decrease the size of the monetary multiplier and decrease the excess reserves held by commercial banks, thus causing the money supply to decrease.

Detailed explanation-4: -Conversely, the Fed increases the reserve ratio requirement to reduce the amount of funds banks have to lend. The Fed uses this mechanism to reduce the supply of money in the economy and control inflation by slowing the economy down.

Detailed explanation-5: -Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up.