Question

Read the following statements carefully and choose the correct answer from the following:
Statement 1 - A change in Cash Reserve Ratio affects the power of commercial banks to create credit.
Statement 2 - An increase in Cash Reserve Ratio increases the excess reserves of commercial banks and limits their lending power.

[0.80 marks]

• A. Both the statements are true.
• B. Both the statements are false.
• C. Statement 1 is true and Statement 2 is false.
• D. Statement 2 is true and Statement 1 is false.

Answer 1

The correct option is C Statement 1 is true and Statement 2 is false.

A change in CRR affects the power of commercial banks to create credit. An increase in CRR reduces the excess reserves of commercial banks and limits their lending power. Consequently, it decreases the flow of credit in the economy.