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UPSC Prelims 2021 Paper-1 📅 10 Oct, 2021

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
Result Summary
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APEDIA

UPSC Prelims
2021 • 10 Oct, 2021 • Paper-1
The money multiplier in an economy increases with which one of the following?
Correct Answer
Increase in the banking habit of the people
Multiplier Concept: The money multiplier represents how much commercial banks can expand the broad money supply through the credit creation process, based on th......
Ref/Book : UPSC Prelims 2021
Ref. Subject Economy
Chapter -
Ref. Topic Banking and Finance
Pg. No -
💡 Analysis & Explanation
Multiplier Concept ▼
The money multiplier represents how much commercial banks can expand the broad money supply through the credit creation process, based on the reserve money they hold.
Reserve Ratios Effect ▼
If the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) is increased, banks must lock away a larger portion of their deposits. This reduces the funds available for lending, thereby shrinking the money multiplier. Thus, options A and B are incorrect.
Behavioural Shifts ▼
When the 'banking habit' of the population increases, individuals prefer to deposit their cash in banks rather than hoarding it at home. This lowers the currency-to-deposit ratio, providing banks with more liquidity to lend out, which fundamentally drives up the money multiplier.
Conclusion ▼
Expanding the banking habit directly enhances the credit creation capacity of the financial system.
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