alleryIf the central bank raises the Cash Reserve Ratio, credit creation by commercial banks will:
Acontract, as the money multiplier falls
Bremain completely unaffected
Cexpand, as banks lend more
Dbecome unlimited
Answer & Solution
Correct answer: A. contract, as the money multiplier falls
A higher CRR shrinks the lendable portion and lowers the multiplier (1/CRR), contracting credit creation.
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