Civil Services Prep

Prelims 2021 · Economy · Question 11

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

Increase in the banking habit of the people

  • (a) Increase in CRR: Higher Cash Reserve Ratio forces banks to keep more funds with RBI, reducing lendable resources. Money multiplier falls. Verdict: Incorrect.
  • (b) Increase in SLR: Higher Statutory Liquidity Ratio makes banks hold more liquid assets, leaving less for credit creation. Money multiplier falls. Verdict: Incorrect.
  • (c) Increase in banking habit of the people: More people depositing money in banks raises deposits and reduces currency held outside banks, strengthening credit creation. Money multiplier rises. Verdict: Correct.
  • (d) Increase in population: Population growth by itself does not directly raise the money multiplier; it depends on banking behavior and reserve ratios. Verdict: Incorrect.
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