When the central bank raises the Cash Reserve Ratio (CR

Let us first derive the money multiplier. Money supply M = C + D (currency plus deposits) Monetary base H = C + R, where R = (r + e)D is total reserves (required plus excess) With c = C/D, the multiplier is m = M/H = (c + 1)/(c + r + e) When the CRR (r) is raised, the denominator increases while the numerator remains the same, so m falls. Banks have to keep a larger fraction of every deposit in reserve, so each rupee of base money supports a smaller volume of deposits. Numerical illustration: let c = 0.20 and e = 0.05. For r = 0.10, m = 1.20/0.35 = 3.43 For r = 0.15, m = 1.20/0.40 = 3.00 The multiplier falls from 3.43 to 3.00. Options (A), (B), (D) and (E) are inconsistent with the formula or irrelevant. Hence the correct option is (C).