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Question
Briefly explain how Cash Reserve Ratio can be used to control credit.
Solution
The portion of a commercial bank's total deposits that it must hold with the reserve bank in the form of cash reserves is referred to as the CRR. As a result, all scheduled banks are obligated to keep a set percentage of their total deposits with the reserve bank (determined by the reserve bank's CRR). By altering this reserve ratio, the reserve bank hopes to affect commercial banks' credit creation power and so regulate the country's credit ratio. Credit contraction occurs when the CRR is raised, while credit growth occurs when the CRR is reduced.
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