CA Foundation · Business Economics · Money Market
Which of the following actions by the RBI would normally reduce the money multiplier?
An increase in the cash reserve ratio reduces the money multiplier. A higher CRR means banks must keep more reserves per rupee of deposits, so less can be lent and redeposited, and the expansion of money supply per rupee of reserve money falls.
- AIncrease in the cash reserve ratioCorrect
- BDecrease in the cash reserve ratio
- CDecrease in the currency-deposit ratio of the public
- DPurchase of government securities in the open market
Explanation
Since m = (1 + c)/(c + r), a higher CRR raises r and the denominator rises more than proportionally, lowering m. A lower CRR or lower c raises m. Open market purchases raise reserve money, not the multiplier.
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