Increase in cash reserve ratio adversely affects the capacity of commercial banks to create credit
True or False with Reasons
Increase in cash reserve ratio adversely affects the capacity of commercial banks to create credit.
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True,
Explanation:-
An increase in the cash reserve ratio reduces the excess reserves of commercial banks and limits their credit-creating power.
Additional Information:-
Cash Reserve Ratio (CRR): It refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central bank.
A change in CRR affects the ability of commercial banks to create credit.
For instance, an increase in CRR reduces the excess reserves of commercial banks and limits their credit-creating power and vice-versa.
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