Q11 · UPSC Prelims 2021 · Set A · Economy

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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

Correct answer: (c) Increase in the banking habit of the people

Explanation

  1. A

    Increase in the Cash Reserve Ratio in the banks

    Higher CRR. Ties up cash; multiplier falls.

  2. B

    Increase in the Statutory Liquidity Ratio in the banks

    Higher SLR. Same direction — more idle reserves.

  3. C

    Increase in the banking habit of the people

    Increase in the banking habit. More deposits inside banks, less cash leakage — multiplier rises.

  4. D

    Increase in the population of the country

    Population increase. Not a multiplier parameter.

Summary. Official key is (c). The money multiplier rises when people hold more of their money as bank deposits (banking habit) rather than cash. CRR and SLR increases shrink it.

Same topic · past papers

UPSC has asked this before

These previous-year questions sit on the same topic. Open one to practise the earlier ask.

  1. 2019 · Q90 · General Studies · 2 marks

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

    View answer →

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