The money multiplier in an economy increases with which one of the following?
  • a)
    Increase in cash reserve ratio
  • b)
    Increase in the banking habit of the population
  • c)
    Increase in the statutory liquidity ratio
  • d)
    Increase in the population of the country
Correct answer is option 'B'. Can you explain this answer?

UPSC Question

By Ram Swarup · Aug 15, 2020 ·UPSC
Saroj Devi answered Aug 15, 2020
The money-multiplier is the maximum amount of broad money (M3 Money) that could be created by the commercial banks for a given fixed amount of base money or reserve ratios. Or, simply it can be stated that the maximum amount of money that the banking system generates with each rupees of reserves.
So, more the people will be linked with the banking system or have the habit of banking more will be the money in use in the form of loans, credits etc. that results an increase in economic activity. This will directly help in increase money multiplier in an economy. The money multiplier goes up because of the reduction in the cash reserve ratio (CRR). 

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