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:
- A higher reserve ratio means banks have less money to lend, reducing credit creation.
- A lower reserve ratio allows banks to lend more, increasing credit creation. - Thus, they are inversely related. 2. Central Bank’s Role in Credit Control:
- The Central Bank (RBI) controls credit creation by adjusting monetary policy tools like CRR (Cash Reserve Ratio), SLR (Statutory Liquidity Ratio), and repo rate. Conclusion: Since both statements are true, option (C) is correct.