The money multiplier in an economy increases with which one of the following?
Answer & explanation
Answer: (c) Increase in the banking habit of the people
Banks create money by lending out deposits, which come back to the banking system as fresh deposits and are lent again. The more of their money people keep in banks rather than as cash, the more rounds of lending take place, so the multiplier rises. Higher reserve ratios do the opposite.
- ✓ (c) A stronger banking habit lowers the share of money held as cash, so more of each loan returns as a deposit and supports further lending.
- ✗ (a) A higher CRR forces banks to keep a larger share of deposits as reserves with the RBI, leaving less to lend and shrinking the multiplier.
- ✗ (b) A higher SLR likewise locks more deposits into liquid assets such as government securities, reducing the funds available for lending.
Remember · Money multiplier rises when people hold less cash and more deposits; it falls when CRR or SLR is raised.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “What the bank lends in each round gets added to the deposits with the bank in the next round.”
- 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 (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·