Civil Services Prep

Prelims 2019 · Economy · Question 30

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

  1. Increase in the cash reserve ratio
  2. Increase in the banking habit of the population
  3. Increase in the statutory liquidity ratio
  4. Increase in the population of the country

Answer

Increase in the banking habit of the population

  • (a) Increase in the cash reserve ratio: Higher CRR means banks must keep more deposits with RBI, leaving less for lending. Money multiplier falls. Verdict: Incorrect.
  • (b) Increase in the banking habit of the population: When people deposit more money in banks and hold less cash, banks can create more credit. Money multiplier rises. Verdict: Correct.
  • (c) Increase in the statutory liquidity ratio: Higher SLR forces banks to keep more funds in liquid assets, reducing lendable resources. Money multiplier falls. Verdict: Incorrect.
  • (d) Increase in the population of the country: Population increase by itself does not mechanically raise the money multiplier; it depends on currency-deposit behavior and reserve ratios. Verdict: Incorrect.
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