WBCS.LIVE practice question

What happens to the overall money supply when the Reserve Bank of India strictly increases the Cash Reserve Ratio (CRR)?

Solve this multiple-choice question and check the correct answer with its explanation below.

Answer options

  1. The money supply increases proportionally.
  2. The inflation rate immediately rises.
  3. The money supply remains unaffected.
  4. The money supply decreases.

Correct answer and explanation

Correct answer: The money supply decreases.

Explanation: āœ… Correct Answer: D) The money supply decreases. šŸ“š Explanation: The Cash Reserve Ratio (CRR) is the specified minimum fraction of total customer deposits that commercial banks must hold as liquid cash exclusively with the RBI. When the RBI increases the CRR, banks inherently have less lendable capital available to disburse as credit to the public. Consequently, the overall money supply in the domestic economy decreases, a mechanism frequently used to curb high inflation.