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Which tool does the RBI use to control the money supply in the economy?

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Question: Which tool does the RBI use to control the money supply in the economy?

Options:

  1. Cash Reserve Ratio (CRR)
  2. Fiscal policy
  3. Public debt management
  4. Foreign exchange reserves

Correct Answer: Cash Reserve Ratio (CRR)

Solution: 

The Cash Reserve Ratio (CRR) is a tool used by the RBI to control the money supply by requiring banks to hold a certain percentage of their deposits as reserves.

Which tool does the RBI use to control the money supply in the economy?

Practice Questions

Q1
Which tool does the RBI use to control the money supply in the economy?
  1. Cash Reserve Ratio (CRR)
  2. Fiscal policy
  3. Public debt management
  4. Foreign exchange reserves

Questions & Step-by-Step Solutions

Which tool does the RBI use to control the money supply in the economy?
  • Step 1: Understand that the Reserve Bank of India (RBI) is the central bank of India.
  • Step 2: Know that the RBI has tools to control the amount of money in the economy.
  • Step 3: Learn about the Cash Reserve Ratio (CRR).
  • Step 4: Recognize that CRR is a percentage of a bank's total deposits that must be kept as reserves with the RBI.
  • Step 5: Realize that by changing the CRR, the RBI can influence how much money banks can lend to people and businesses.
  • Step 6: Conclude that when the RBI increases the CRR, banks have less money to lend, which reduces the money supply in the economy.
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