UPSC Prelims 2021 · Question 11 of 97
UPSC Prelims 2021 question on Money Multiplier
- ExamUPSC CSE
- Year2021
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyMedium
- TypeDirect
The money multiplier in an economy increases with which one of the following?
Show answer
Answer: C. Increase in the banking habit of the people
Verdict
Correct answer → Option (c).
Analysis
Banks create money by making loans. A bank loans or invests its excess reserves to earn more interest. A one-rupee increase in the monetary base causes the money supply to increase by more than one rupee — this increase is the money multiplier.
Money Multiplier = 1/CRR (in a simple model). As CRR or SLR is increased by RBI, money multiplier is decreased, as there would be less amount of money for credit creation with the banks.
Statement by statement
Option (a) — INCORRECT: An increase in CRR reduces the money multiplier.
Option (b) — INCORRECT: An increase in SLR also reduces the money multiplier.
Option (c) — CORRECT: An increase in banking habit of the people leads to a lower cash-deposit ratio (people keep more money in banks rather than as cash), which leads to a higher money multiplier.
Option (d) — INCORRECT: Money multiplier in the economy increases with the banking habit of the people, not merely an increase in the population.