Financial Awareness - Risk, Stability & Emerging Finance
If the CRR is reduced from 10% to 5%, what is the expected impact on the money supply in the economy?
If the CRR is reduced from 10% to 5%, what is the expected impact on the money supply in the economy?
medium Q8 of 15
Step-by-Step Solution
Step 1: Understand effect of CRR on credit creation
Lower CRR means banks keep less reserves and can lend more, increasing credit creation.Step 2: Impact on money supply
More credit creation leads to an increase in money supply in the economy.Final Answer:
Money supply increases as banks can create more credit → Option AQuick Check:
Decrease in CRR = increase in money supply ✅
Quick Trick: Lower CRR boosts credit and money supply.
Common Mistakes:
- Assuming lower CRR decreases money supply.
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