Question

A lowering of Cash Reserve Ratio by the Central Bank will result in
1. Expansion of credit
2. Contraction of credit
3. Cheap money policy
4. Dear money policy
Which of the above statement(s) is/are correct?

• A. Only 1 and 4
• B. Only 2 and 4
• C. Only 1 and 3
• D. Only 2 and 3

Answer 1

The correct option is C Only 1 and 3

Explanation: Cash Reserve Ratio is a ratio of their total deposits which banks have to keep with the RBI in cash. This ratio at present is 4 percent. When this ratio is lowered, banks will have more to lend so that credit is expanded as banks may lend even at lower rates, called cheap money policy.