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: Understanding the Question:
Cash Reserve Ratio (CRR) is the fraction of a bank's deposits that must be kept with the central bank, and it is a quantitative monetary-policy tool.

Step 2: Why option B is correct:
A fall in CRR frees up more funds with commercial banks for lending. Through the credit-multiplier process this increases the money supply, which lowers interest rates and raises investment and consumption spending — i.e. aggregate demand rises.

Step 3: Why option A is wrong:
A fall (not rise) in aggregate demand would follow an increase in CRR, which restricts lending — the opposite of what is asked here.

Step 4: Why option C is wrong:
Since CRR directly affects banks' lendable funds and hence the money supply, "no change" contradicts the entire monetary-transmission mechanism.

Step 5: Why option D is wrong:
A fall in CRR is expansionary (raises AD, and typically raises prices), so a fall in the general price level would be inconsistent — that outcome follows a CRR hike, not a cut.

Final Answer:
A decrease in CRR causes a rise in aggregate demand.