UPSC Previous Year Question | Prelims GS | 2021

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

  1. Increase in the Cash Reserve Ratio in the banks
  2. Increase in the Statutory Liquidity Ratio in the banks
  3. Increase in the banking habit of the people
  4. Increase in the population of the country

Answer

Correct Answer

Increase in the banking habit of the people

Explanation

The money multiplier is inversely related to the reserve requirements (CRR, SLR) and to the currency-deposit ratio of the public. A higher CRR or SLR reduces lendable resources and lowers the multiplier, while a greater banking habit lowers the currency held by the public, raises deposits and thus raises the multiplier. Population growth by itself does not change it.

Topics: banking & monetary policy, economy, money multiplier, money supply