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CA Foundation · Business Economics · Money Market

Which of the following actions by the RBI would, other things remaining equal, tend to reduce the money multiplier?

Raising the cash reserve ratio reduces the money multiplier. Banks must keep a larger fraction of deposits with the RBI, leaving less for lending and redeposit, so each rupee of reserve money supports a smaller expansion of deposits and money supply.

  1. ALowering the cash reserve ratio (CRR)
  2. BRaising the cash reserve ratio (CRR)Correct
  3. CBuying government securities through open market operations
  4. DLowering the repo rate to encourage borrowing

Explanation

A higher CRR forces banks to keep a larger share of deposits as reserves with the RBI, so less can be lent and redeposited. This lowers the multiplier. Option C raises reserve money rather than changing the multiplier, so it is not the answer.

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