Discussion
If the cash reserve ratio is lowered by the RBI, its impact on credit creation will be to
Answer: A
Credit creation will increase.
The credit multiplier is the reciprocal of the reserve ratio: \[\text{deposit multiplier} = \frac{1}{CRR}\] A lower CRR leaves banks more of each deposit to lend, so a given cash base supports more credit. Raising the CRR contracts credit in the same way.
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