The money multiplier in an economy increases with which one of the following?
A
Increase in the cash reserve ratio
B
Increase in the banking habit of the population
Correct Answer
C
Increase in the statutory liquidity ratio
D
Increase in the population of the country
Explanation
The money multiplier increases with the banking habit of the population because higher deposits provide banks with more loanable funds, facilitating greater credit creation through the fractional reserve system. In contrast, increasing the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) decreases the multiplier by forcing banks to lock away more funds as reserves, thereby limiting their lending capacity. This concept tests the inverse relationship between reserve requirements and the total money supply generated from the monetary base.
Monetary PolicyMoney Supply, Credit CreationMoney multipliereconomycash reserve ratio (CRR)banking habitpopulationstatutory liquidity ratio (SLR)