Question
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:
C
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Explanation:
The money multiplier is a concept that represents the potential expansion of the money supply through the fractional reserve banking system. When people have a greater tendency to deposit money in banks, it leads to an increase in bank reserves. As a result, banks can lend out a larger proportion of their deposits, thereby increasing the money supply through the creation of loans.
Increasing the Cash Reserve Ratio (option a) or the Statutory Liquidity Ratio (option b) in banks would have the opposite effect of reducing the potential expansion of the money supply. These ratios determine the amount of reserves that banks are required to hold against their deposits, limiting their lending capacity.
The increase in the population of the country (option d) does not directly affect the money multiplier. While population growth can influence economic factors, such as consumption and investment, it does not have a direct impact on the money multiplier itself.
Therefore, the correct answer is option (c) - Increase in the banking habit of the people.