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

1. A. Increase in the cash reserve ratio
2. B. Increase in the banking habit of the population
3. C. Increase in the statutory liquidity ratio
4. D. Increase in the population of the country

Answer: B

Explanation

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 the 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. Therefore, it refers to how an initial deposit can lead to a bigger final increase in the total money supply. For example, if the commercial banks gain deposits of Rs1 Lakh and this leads to a final money supply of Rs 10 lakh. The money multiplier is 10. Therefore, an increase in the banking habit of the population would lead to more deposits and hence an increase in Money Multiplier.Hence (b) is the correct answer.