The money multiplier in an economy increases with which one of the following?
Answer & explanation
Answer: (b) Increase in the banking habit of the population
The money multiplier rises when people keep more of their money as bank deposits rather than as cash, because banks then have more deposits to lend and re-lend. A better banking habit lowers the share of money held as currency, so the multiplier goes up.
- ✓ (b) The multiplier depends on the currency/deposit ratio. When more people use banks, less money stays outside the banking system as cash, so the ratio falls and the multiplier rises.
- ✗ (a) A higher cash reserve ratio leaves banks with less to lend. In NCERT's example a 20 per cent CRR limits credit creation, giving a multiplier of 5; a higher CRR would lower it.
- ✗ (c) SLR is a further requirement to hold reserves in liquid form. It is not part of the cash-reserve multiplier NCERT derives, and raising it would not increase money creation.
- ✗ (d) The multiplier depends on ratios such as the CRR and the currency/deposit ratio, not on how many people live in the country.
Remember · Money multiplier rises when the currency/deposit ratio falls (more banking habit) and falls when the cash reserve ratio rises.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- RBI Bulletin, August 2018 (Forex Market Operations and Liquidity Management), on the money multiplier ↗ “money multiplier (ratio of broad money to base money) (Mul), because multiplier may change due to change in CRR or currency/deposit ratio”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “Given a CRR of 20 per cent, the bank cannot give a loan beyond Rs 400. Hence, requirement of reserves acts as a limit to money creation.”
Question and answer: UPSC's official GS Paper I (2019, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·