The money multiplier in an economy increases with which one of the

The money multiplier in an economy increases with which one of the following?

Increase in the Cash Reserve Ratio in the banks

Increase in the Statutory Liquidity Ratio in the banks

Increase in the banking habit of the people

Increase in the population of the country

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2021

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The money multiplier in an economy increases with an increase in the banking habit of the people.

The money multiplier is the ratio of the money supply to the monetary base. It is influenced by the reserve requirements (CRR, SLR) and the public’s preference for holding currency versus deposits. The formula for the money multiplier is approximately (1 + Currency Ratio) / (Reserve Ratio + Currency Ratio). The Currency Ratio is the ratio of currency held by the public to demand deposits.
An increase in the banking habit of people means they prefer to hold less cash and deposit more money in banks, leading to a decrease in the Currency Ratio. A lower Currency Ratio in the money multiplier formula results in a higher money multiplier.

Increase in CRR (A) increases the Reserve Ratio, decreasing the money multiplier. Increase in SLR (B) also increases the Reserve Ratio, decreasing the money multiplier. Increase in population (D) does not directly determine the money multiplier, though it can affect the total volume of money and economic activity.

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