QUESTION

Medium

Economy

Prelims 2019

The money multiplier in an economy increases with which one of the following?

Select an option to attempt

Explanation

Money multiplier: It refers to the extent to which commercial banks can create new money based on deposits. It's calculated as the reciprocal of the reserve ratio (required reserves divided by total deposits).

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): These are regulatory tools used by the central bank to control the money supply.

Higher CRR and SLR: Banks are required to hold a larger portion of deposits as reserves with the central bank. This reduces the amount of money available for lending, thus decreasing the money multiplier.

Lower CRR and SLR: Banks can lend out a larger portion of deposits, increasing the money multiplier.

Banking habit: When people deposit more money in banks, it increases the pool of funds available for lending. This allows banks to create more new money through the lending process, leading to a higher money multiplier.

Population growth: While population growth can lead to higher demand for money, it doesn't directly affect the money multiplier mechanism itself.

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