What happens when CRR is increased?a.Decrease in inflationb.Decrease in money supplyc.Increase in demand for moneyd.All of the above
Question
What happens when CRR is increased?a.Decrease in inflationb.Decrease in money supplyc.Increase in demand for moneyd.All of the above
Solution
When CRR (Cash Reserve Ratio) is increased, several effects can occur. Let's break it down step by step:
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Decrease in inflation: Increasing the CRR means that banks are required to hold a higher percentage of their deposits as reserves with the central bank. This reduces the amount of money available for lending and spending in the economy. With less money circulating, there is a decrease in the overall demand for goods and services, leading to a decrease in inflationary pressures.
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Decrease in money supply: As mentioned earlier, when the CRR is increased, banks have to keep a larger portion of their deposits as reserves. This reduces the amount of money available for lending and investment purposes. Consequently, the overall money supply in the economy decreases.
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Increase in demand for money: When the CRR is increased, banks have less money available for lending. This can lead to an increase in the demand for money as individuals and businesses may find it harder to access credit. They may need to hold more cash to meet their immediate financial needs, resulting in an increased demand for money.
Therefore, the correct answer is "d. All of the above." Increasing the CRR can lead to a decrease in inflation, a decrease in money supply, and an increase in the demand for money.
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