Question

Increase in CRR __________ money supply.

• A. reduces
• B. increase
• C. no affect
• D. both (a) and (b) possible

Answer 1

The correct option is A reduces

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. Therefore, increase in cash reserve ratio(CRR) reduces the money supply in the economy.