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

Explanation : 

Money Multiplier

The money multiplier is a concept that describes the maximum amount of money that banks can theoretically create with each unit of central bank money. It is influenced by the reserve requirements set by the central bank and the behavior of the banking public.

Impact of Reserve Requirements on the Money Multiplier

An increase in the Cash Reserve Ratio (CRR) in the banks means that banks must hold a higher percentage of their deposits as reserves. This reduces their ability to lend and thus, decreases the money multiplier. Similarly, an increase in the Statutory Liquidity Ratio (SLR) mandates banks to keep a higher proportion of their deposits in liquid form, also reducing the money multiplier.

The Role of Banking Habits in the Money Multiplier

An increase in the banking habit of the people leads to more deposits in banks, which enhances the base for the money creation process. With more funds available for lending, the banking system can amplify the initial deposits through continuous lending and redepositing, thereby increasing the money multiplier effect.

Population Growth and the Money Multiplier

Although an increase in the population of a country can lead to more banking activity, it does not have a direct impact on the money multiplier. Instead, the money multiplier is more closely related to the proportion of the population engaging in banking activities and the prevailing regulatory measures.

Finally, the most significant factor affecting the money multiplier is the increase in banking habits among people, as it directly expands the base of funds available for the money creation process within the banking system.