UPSC Prelims 2019 · Question 30 of 99
UPSC Prelims 2019 question on Money Multiplier
- ExamUPSC CSE
- Year2019
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicBanking
- DifficultyMedium
- TypeDirect
The money multiplier in an economy increases with which one of the following?
Show answer
Answer: B. Increase in the banking habit of the population
Verdict
Correct answer: Increase in the banking habit of the population → Option (b).
Analysis
Money Multiplier is the ratio of the stock of money to the stock of high powered money. It is the relationship between the monetary base and money supply of an economy. It explains the increase in the amount of cash in circulation generated by the banks' ability to lend money out of their depositors' funds. It refers to how an initial deposit can lead to a bigger final increase in the total money supply.
Increase in Cash Reserve Ratio (CRR) would reduce the money multiplier as banks keep more money as reserves.
Increase in banking habit of the population would lead to more deposits and hence more money available for banks to lend, which increases the Money Multiplier. Hence (b) is the correct answer.
Increase in Statutory Liquidity Ratio (SLR) would reduce the money multiplier as banks keep more money in liquid assets.
Increase in population alone does not necessarily increase the money multiplier.