On May 22, 2020, the RBI reduced the policy repo rate by 40 bps (100 bps = 1 per cent), from 4.4 per cent to 4 per cent. The Marginal Standing Facility (MSF) rate was reduced to 4.25 per cent and reverse repo rate to 3.35 per cent.

i) Explain why the inter-bank interest rate (the call money rate) typically stays inside the above corridor of policy rates, i.e. the call money rate does not go beyond the MSF rate and does not fall below the reverse repo rate. (4 marks)

ii) Explain (using appropriate graphs) the effects of an increase in CRR on (1) money supply/ money demand, (2) investment expenditure, (3) GDP & price level. (6 marks)