gs1medium
The money multiplier in an economy increases with which one of the following?
- A.Increase in the Cash Reserve Ratio in the banks
- B.Increase in the Statutory Liquidity Ratio in the banks
- C.Increase in the banking habit of the people
- D.Increase in the population of the country
▶ Answer & Explanation
Correct answer: C. Increase in the banking habit of the people
The money multiplier reflects the process by which initial deposits lead to a larger expansion of the money supply. A higher banking habit means more currency is deposited into the banking system, increasing the base for credit creation and thus expanding the money supply more significantly. Conversely, higher CRR or SLR would require banks to hold more reserves, reducing the amount available for lending and thereby decreasing the money multiplier effect.
Source: UPSC gs1 2021