Question : Which among the following statements is incorrect?
Option 1: An increase in the bank rate will decrease the money supply.
Option 2: The lower the Cash Reserve Ratio (CRR), the lower will be the liquidity in the system.
Option 3: The higher the Cash Reserve Ratio (CRR), the lower the liquidity in the system.
Option 4: The lower the Statutory Liquidity Ratio (SLR), the higher the liquidity in the system.
Correct Answer: The lower the Cash Reserve Ratio (CRR), the lower will be the liquidity in the system.
Solution : The correct option is The lower the Cash Reserve Ratio (CRR), the lower will be the liquidity in the system.
The Reserve Bank of India (RBI) has mandated that all commercial banks adhere to the specific Cash Reserve Ratio (CRR) guidelines that are sent to each bank. There would be little liquidity in the economy when the CRR rate for the amount held with the RBI is high. The relationship between the CRR and the RBI is as follows: the smaller the CRR that is held with the RBI, the greater the total liquidity of the economy.
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