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
Correct answer
D
Increase in the population of the country
Explanation
The money multiplier is the ratio of broad money to reserve money. It rises when people keep more of their money as bank deposits instead of cash, because banks can lend out a larger share of those deposits and create more credit; an increase in the banking habit of the people does exactly that. A higher CRR or SLR does the opposite, since banks must set aside more of each deposit, so the multiplier falls. Population size does not by itself change the multiplier.