[Solved] The Money multiplier in an economy increases with which one of the following?

Q11. 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

Answer: B

• In the financial system, banks can enhance money supply by expanding loans out of the deposits they receive.

• The deposit received by commercial banks are part of base money.

• But after receiving the deposits, banks create money by expanding loans and cheque facilities.

• Here, the banking system as a whole can create additional money impact through deposit acceptance and loan disbursal.

• The multiple in which the banking system can expand deposits received in the form of base money into broad money is called money multiplier.

• From a practical sense, money multiplier shows what is the proportion of broad money compared to base money.

• The money multiplier, m, is the inverse of the reserve requirement, RR