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

Increase in the cash reserve ratio

Increase in the banking habit of the population

Increase in the statutory liquidity ratio

Increase in the population of the country

APEDIA

UPSC Prelims

2019 • 02 Jun, 2019 • Paper-1

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

Correct Answer

Increase in the banking habit of the population

Money Multiplier Mechanics: The crucial economic metric known as the 'money multiplier' dictates exactly how a single initial base deposit systematically leads ......

💡 Analysis & Explanation

Money Multiplier Mechanics ▼

The crucial economic metric known as the 'money multiplier' dictates exactly how a single initial base deposit systematically leads to a vastly greater final increase in the total broad money supply through the continuous cycle of the fractional-reserve banking system. Mathematically, it is inversely proportional to mandated reserve ratios.

Impact of Banking Habits ▼

When a significantly larger segment of the national population actively utilizes formal banking services instead of idly hoarding physical currency under their mattresses (an increase in the 'banking habit'), substantially more liquid funds remain persistently within the formal banking channels. Consequently, banks can systematically and continuously lend out these recurring deposits repeatedly, dynamically accelerating the credit creation process and rapidly expanding the size of the multiplier.

Conclusion ▼

Enhanced public banking habits directly and organically turbocharge the money multiplier effect across the economy.

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