Question

CRR/SLR help checking inflation/deflation by ________.

• A. sucking/injecting money supply
• B. increasing/decreasing cost of money
• C. increasing/decreasing production
• D. reducing/increasing government spending

Answer 1

The correct option is A sucking/injecting money supply

Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash. 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 which corrects the situation of inflation and by decreasing the cash reserve ratio, the commercial banks has to maintain less cash with the central bank which increases their credit creation capacity and therefore money supply in the economy also increases which corrects the situation of deflation.

Statutory Liquidity Ratio (SLR) refers to liquid assets i.e. cash which the commercial banks must hold with themselves on a daily basis as a portion of their total deposits. By increasing the statutory liquidity ratio, the commercial banks has to maintain more cash with themselves which reduces their credit creation capacity and therefore money supply in the economy also reduces which corrects the situation of inflation and by decreasing the statutory liquidity ratio, the commercial banks has to maintain less cash with themselves which increases their credit creation capacity and therefore money supply in the economy also increases which corrects the situation of deflation.