Question

Decrease in Cash Reserve Ratio will lead to

• A. fall in aggregate demand
• B. rise in aggregate demand
• C. no change in aggregate demand
• D. fall in general price level

Hint:

Lower CRR → more lendable funds → higher money supply → higher AD.

Answer 1

The Correct Option is B

Step 1: Trace the mechanism step by step:
Lower CRR → banks keep less as mandatory reserves → more funds available to lend → credit expands via the money multiplier → money supply rises.

Step 2: Connect money supply to demand:
A larger money supply, other things equal, lowers the interest rate, which encourages both investment by firms and consumption by households — both are components of aggregate demand.

Step 3: Rule out the alternatives:
A price-level fall or no change in AD would require a contractionary, not expansionary, policy stance, which is the opposite of cutting CRR.

Final Answer:
Option B, rise in aggregate demand.