Question

Read the following statements carefully: Statement 1: Reserve ratio and Credit creation process are inversely related. Statement 2: Central Bank of an economy performs the vital function of controlling the credit creation process. (Choose the correct alternative)

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

A higher reserve ratio decreases credit creation, while a lower reserve ratio boosts lending.

Answer 1

The Correct Option is C

1. Reserve Ratio and Credit Creation:
- An elevated reserve ratio restricts a bank's lending capacity, consequently diminishing credit creation.
- A reduced reserve ratio enhances a bank's lending capacity, thereby augmenting credit creation. - Consequently, these two factors exhibit an inverse relationship. 2. Central Bank's Function in Credit Regulation:
- The Central Bank, such as the RBI, manages credit creation through the modification of monetary policy instruments, including the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and the repo rate. Conclusion: Given the veracity of both assertions, option (C) is the accurate selection.