Read the passage carefully and answer the question based on the passage:

Role of Money

In modern economics, money plays a very crucial role as medium of exchange, unit of account, store of value and standard of deffered payment. The banking system, a cornerstone of financial markets, facilitates the creation and circulation of money.

Commercial banks accept deposits from the public and provide loans. A fraction of the deposits are kept by the commercial banks as reserves and the rest is lent out. This amplifies the money supply in the economy through the 'Multiplier Effect'. The RBI as central Bank regulates the money supply through monetary policy tools. These tools influence the credit availability and overall liquidity in the system, impacting inflation, growth and employment.

What happens to money supply if the RBI increases the cash reserve ratio?

Money supply decreases.

The correct answer is Option (2) → Money supply decreases.

The Cash Reserve Ratio (CRR) is a monetary policy tool used by the central bank (RBI in India) to control the money supply in the economy. It refers to the percentage of a bank's total deposits that it must keep as reserves with the central bank. When the RBI increases the CRR, banks are forced to hold more money and have less to lend.This reduces the credit creation capacity of banks, leading to a decrease in the money supply in the economy.