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Monetary policy: Effect of lowering the Cash Reserve Ratio (CRR). Full question: If the RBI lowers the CRR, what happens to the banking system's ability to create credit? Choose the correct option.

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Credit creation rises as the money multiplier increases
Credit creation falls as banks must hold more idle reserves
No change in credit as CRR is unrelated to reserves
Credit creation collapses due to higher policy rates automatically

Correct Answer: Credit creation rises as the money multiplier increases

Explanation:

Given data

Policy change: CRR reduced by the RBI.

Concept / Approach Required reserve ratio rr ↓ ⇒ excess reserves ↑ ⇒ banks can extend more loans ⇒ deposit creation expands. Money multiplier m ≈ 1/rr (simplified, ignoring leakages); when rr falls, m rises.

Step-by-step illustration Example: If rr = 4% ⇒ m ≈ 1/0.04 = 25; if rr is cut to 3% ⇒ m ≈ 1/0.03 ≈ 33.3 ⇒ higher potential for deposit/credit creation.

Monetary policy: Effect of lowering the Cash Reserve Ratio (CRR). Full question: If the RBI lowers the CRR, what happens to the banking system's ability to create credit? Choose the correct option.

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