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If CRR is raised, the immediate effect on money supply is
AMoney supply is unchanged
BMoney supply doubles
CMoney supply expands because banks have more reserves
DMoney supply contracts because banks can lend less
Answer & Solution
Correct answer: D. Money supply contracts because banks can lend less
Higher CRR means each rupee of deposit supports fewer loans (money multiplier 1/CRR falls). Banks must call back or stop new lending, reducing money supply.
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