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Question

What is the effect of an increase in the CRR on the volume of credit in the economy?


A

Constant credit

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B

Contraction in credit

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C

Zero credit

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D

Expansion in credit

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Solution

The correct option is B

Contraction in credit


When credit is to be reduced, the central bank can increase the Cash Reserve Ratio, thus reducing the cash resources of banks forcing them to contract credit.


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