Question

If CRR (cash reserve ratio) is increased from 10% to 20%, what should be the change in credit supply, other things remaining constant? Explain.

Answer 1

We know that the Credit Multiplier = $\frac{1}{\text{CRR}}$

When CRR increases from 10% to 20%, credit multiplier is reduced to half of its earlier value. Accordingly, the supply of credit in the economy should reduce to half, when other things are constant.