InterviewSolution
Saved Bookmarks
InterviewSolution
| 1. |
Explain the role of 'Cash Reserve Ratio' in controlling 'Credit Creation'. |
|
Answer» CRR refers to the percentages of deposits required to keep with the Central Bank Raising CRR reduces funds with the Commercial Banks for lending. Credit creation decreased. Detailed Answer: CRR refers to the minimum proportion of the total deposits that the commercial banks has to maintain with the central bank in the form of reserves. 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. On the contrary, a fall in CRR will lead to an increase in the money supply. CRR = Deposits with the banks => Cash reserve of the bank => Lending capacity of banks => Money supply CRR => Deposits with the banks => Cash reserve of the bank => Lending capacity of bank => Money supply |
|