Home » UPSC IAS » The money multiplier in an economy increases with which one of the

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

June 1, 2025 by rawan239

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

Increase in the cash reserve ratio

Increase in the banking habit of the population

Increase in the statutory liquidity ratio

Increase in the population of the country

This question was previously asked in

UPSC IAS – 2019

Download PDF Attempt Online

The correct answer is B) Increase in the banking habit of the population.

The money multiplier is the ratio of the money supply to the monetary base (high-powered money). It is inversely related to the reserve ratio (CRR + SLR) and the public’s cash-to-deposit ratio. When the banking habit of the population increases, people hold less cash and deposit more money in banks. This reduces the cash-to-deposit ratio. With a lower cash-to-deposit ratio, a larger proportion of the monetary base is held as reserves by banks, enabling banks to create more credit and expand the money supply through the process of deposit multiplication, thereby increasing the money multiplier.

Options A and C are incorrect because an increase in the Cash Reserve Ratio (CRR) or the Statutory Liquidity Ratio (SLR) forces banks to hold more reserves, reducing the funds available for lending and decreasing the money multiplier. Option D, an increase in the population, does not directly or necessarily increase the money multiplier; its effect would depend on how it influences other factors like banking habits or savings rates.

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