Economics · Economy
With reference to the mechanics of deposit creation in a fractional reserve banking system, consider the following statements: Statement I: A reduction in the Cash Reserve Ratio (CRR), other things remaining constant, increases the theoretical value of the simple money multiplier. Statement II: A lower CRR increases the proportion of deposits available for lending, thereby amplifying successive rounds of credit creation within the banking system. Which one of the following is correct with respect to the above statements?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Both Statement I and Statement II are correct and Statement II is the correct explanation of Statement I.✓
- 2Both Statement I and Statement II are correct but Statement II is not the correct explanation of Statement I.
- 3Statement I is correct but Statement II is incorrect.
- 4Statement I is incorrect but Statement II is correct.
Correct answer
Both Statement I and Statement II are correct and Statement II is the correct explanation of Statement I.
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