The Money Multiplier and Factors Affecting It

The money multiplier refers to the amount of money that is created in the economy as a result of each unit of currency being deposited into the banking system. It is a measure of the potential expansion of the money supply in an economy. The higher the money multiplier, the greater the potential for money creation.

There are several factors that can influence the money multiplier in an economy. Among these factors, an increase in the banking habit of the people has a direct impact on the money multiplier. Let us understand why this is the correct answer.

Factors Affecting the Money Multiplier:

1. Cash Reserve Ratio (CRR): The CRR is the percentage of deposits that banks are required to keep as reserves with the central bank. An increase in the CRR reduces the amount of money that banks can lend, leading to a decrease in the money multiplier. Therefore, option 'a' is incorrect.

2. Statutory Liquidity Ratio (SLR): The SLR is the percentage of deposits that banks are required to keep in the form of liquid assets. An increase in the SLR also reduces the amount of money available for lending, thus decreasing the money multiplier. Therefore, option 'b' is incorrect.

Impact of the Banking Habit:

3. Banking Habit of the People: When people deposit their money in banks instead of holding it as cash, it increases the amount of reserves available to banks. This, in turn, allows banks to lend out a larger proportion of their deposits, leading to an increase in the money multiplier. The more people develop a habit of depositing their money in banks, the higher the money multiplier becomes. Therefore, option 'c' is the correct answer.

Other Factors:

4. Population of the Country: The population of a country does not directly impact the money multiplier. The money multiplier depends on the behavior of individuals and banks, rather than the absolute number of people in the country. Therefore, option 'd' is incorrect.

Conclusion:

The money multiplier in an economy increases with an increase in the banking habit of the people. When individuals deposit their money in banks, it allows banks to lend out a larger proportion of their deposits, thereby increasing the money multiplier. This has a positive impact on the expansion of the money supply in the economy.