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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?
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The money multiplier in an economy increases with which one of the fol...
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).
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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The money multiplier in an economy increases with which one of the fol...
Money Multiplier and its Factors
The money multiplier is a term used to describe the effect that a change in the money supply has on the economy. It is the ratio of the increase in the money supply to the increase in the monetary base. The multiplier effect occurs because when banks lend out money, that money is deposited in other banks, where it can be lent out again. This process continues, resulting in an increase in the money supply.
Factors affecting the money multiplier:
1. Cash reserve ratio: The cash reserve ratio is the amount of money that banks are required to hold in reserve. An increase in the cash reserve ratio reduces the amount of money that banks can lend, decreasing the money multiplier.
2. Banking habit of the population: The banking habit of the population refers to the percentage of the population that uses banks to deposit their money. An increase in the banking habit of the population leads to more deposits, which can be lent out, increasing the money multiplier.
3. Statutory liquidity ratio: The statutory liquidity ratio is the amount of liquid assets that banks are required to hold. An increase in the statutory liquidity ratio reduces the amount of money that banks can lend, decreasing the money multiplier.
4. Population of the country: The population of the country affects the money multiplier indirectly. A larger population means more people are using banks, which can lead to an increase in the money multiplier. However, a larger population also means that more money is needed to meet the needs of the population, which can lead to a decrease in the money multiplier.
Conclusion:
Thus, the correct option in this question is B, an increase in the banking habit of the population. This is because an increase in the number of people who use banks leads to an increase in deposits, which can be lent out, increasing the money multiplier.
The money multiplier is a term used to describe the effect that a change in the money supply has on the economy. It is the ratio of the increase in the money supply to the increase in the monetary base. The multiplier effect occurs because when banks lend out money, that money is deposited in other banks, where it can be lent out again. This process continues, resulting in an increase in the money supply.
Factors affecting the money multiplier:
1. Cash reserve ratio: The cash reserve ratio is the amount of money that banks are required to hold in reserve. An increase in the cash reserve ratio reduces the amount of money that banks can lend, decreasing the money multiplier.
2. Banking habit of the population: The banking habit of the population refers to the percentage of the population that uses banks to deposit their money. An increase in the banking habit of the population leads to more deposits, which can be lent out, increasing the money multiplier.
3. Statutory liquidity ratio: The statutory liquidity ratio is the amount of liquid assets that banks are required to hold. An increase in the statutory liquidity ratio reduces the amount of money that banks can lend, decreasing the money multiplier.
4. Population of the country: The population of the country affects the money multiplier indirectly. A larger population means more people are using banks, which can lead to an increase in the money multiplier. However, a larger population also means that more money is needed to meet the needs of the population, which can lead to a decrease in the money multiplier.
Conclusion:
Thus, the correct option in this question is B, an increase in the banking habit of the population. This is because an increase in the number of people who use banks leads to an increase in deposits, which can be lent out, increasing the money multiplier.
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The money multiplier in an economy increases with which one of the following?a)Increase in cash reserve ratiob)Increase in the banking habit of the populationc)Increase in the statutory liquidity ratiod)Increase in the population of the countryCorrect answer is option 'B'. Can you explain this answer?
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