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Questions
State the impact of an increase in Cash Reserve Ratio on loanable funds.
What is the impact of an increase in Cash Reserve Ratio on loanable funds?
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Solution
- An increase in the Cash Reserve Ratio (CRR) requires commercial banks to maintain a higher portion of their deposits as reserves with the Reserve Bank of India.
- This reduces the amount of money available to banks for lending, resulting in a fall in total loanable funds.
- As a result, bank's ability to lend to consumers and businesses decreases, thereby slowing economic activity.
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| Column A | Column B | ||
| (i) | A rate of interest at which the central bank (RBI) lends money to member commercial banks to meet they long term needs. | A. | Cash Reserve Ratio |
| (ii) | A rate of interest at which RBI lends money to commercial banks to meet their short term needs. | B. | Statutory liquidity ratio |
| (iii) | A minimum percentage of total deposits kept by banks with the Central Bank. | C. | Repo rate |
| (iv) | A minimum percentage of total deposits to be kept by banks inform of liquid assets with themselves. | D. | Bank rate |
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