Q. If a central bank decides to lower the Cash Reserve Ratio (CRR), which one of the following is the likely impact on the money supply in the economy?

[A] Money supply decreases

[B] Money supply increases

[C] Money supply decreases for a while and then increases

[D] Money supply remains unchanged

Answer: B
Notes:

Explanation – The Cash Reserve Ratio (CRR) is the percentage of deposits that banks are required to maintain with the central bank. By lowering the CRR, the central bank essentially releases more funds that banks can lend out. This, in turn, leads to an expansion of the money supply in the economy. As a result, the lower CRR reserved with the central bank leads to higher overall liquidity in the economy, which increases the money supply.

Source: CNBC

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