ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Ans: False, Higher CRR implies lower capacity of the commercial banks to create credit as credit multiplier is the reciprocal of CRR..

Detailed explanation-2: -Credit creation is inversely related to the legal reserve ratio. X Total credit creation (or money creation) = Initial deposits × 1/Legal Reserve Ratio Higher the legal reserve ratio, lesser will be the credit creation by the commercial banking system and vice-versa.

Detailed explanation-3: -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-4: -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-5: -By increasing the cash reserve ratio, the commercial banks has to maintain more cash with the central bank which reduces their credit creation capacity and therefore money supply in the economy also reduces. Therefore, increase in cash reserve ratio(CRR) reduces the money supply in the economy.