What would be the impact on the economy if people start holding more currency in hand and less in deposits ?
[amp_mcq option1=”Money demand will increase” option2=”Money multiplier will decrease” option3=”Money multiplier will increase” option4=”Money demand will decrease” correct=”option2″]
This question was previously asked in
UPSC CDS-2 – 2023
When people hold more currency in hand and less in deposits, the currency-deposit ratio increases. The money multiplier, which determines the total money supply in the economy based on the monetary base, is inversely related to the currency-deposit ratio. Specifically, the simple money multiplier formula is (1+c)/(c+r), where c is the currency-deposit ratio and r is the reserve-deposit ratio. An increase in ‘c’ directly reduces the value of the money multiplier.