Previous Year Question

The Money Multiplier represents the ratio between broad money and Reserve Money or High-Powered Money:

Here, M₃ represents Broad Money and M₀ represents Reserve Money. The multiplier indicates the amount of broad money that the banking system supports on the basis of the monetary base created by the central bank.

Option (b) is correct.

An increase in the banking habit of the population means that people keep a comparatively larger proportion of their money as bank deposits instead of currency. This reduces the Currency-Deposit Ratio.

Banks maintain a portion of their deposits as required reserves and can use the remaining portion for lending. A loan extended by one bank may become a deposit in another account, supporting further lending and deposit creation.

The general relationship is:

Lower preference for currency → Higher bank deposits → Greater credit creation → Higher money multiplier

Option (a) is incorrect.

When the Cash Reserve Ratio increases, banks must retain a larger part of their deposits as cash reserves with the RBI. This reduces lendable resources and limits deposit creation. A higher CRR therefore generally reduces the Money Multiplier.

Under a simplified framework:

This simplified expression demonstrates the inverse relationship between the reserve ratio and the multiplier.

Option (c) is incorrect.

A higher SLR requires banks to hold a larger proportion of their Net Demand and Time Liabilities in specified liquid assets. This may reduce funds available for lending to the private sector and restrict money creation.

Option (d) is incorrect.

Population growth may increase the demand for money, but it does not necessarily increase the Money Multiplier. The outcome depends upon the public’s preference between currency and bank deposits and the excess reserves maintained by banks.