The money multiplier in an economy increases with which one of the following?
[UPSC Civil Services Exam – 2021 Prelims]
(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)
Explanation:
- An expansion in banking operations will result in a greater amount of funds held by banks, encompassing Time Deposits (Fixed Deposits, Recurring Deposits), Demand Deposits (Savings Bank Accounts), Cash, and other forms.
- Consequently, an increase in people’s inclination towards banking services will boost the money multiplier.
- Banks generate money by extending loans or investing their surplus reserves to earn additional interest.
