Q. The money multiplier in an economy increases with which one of the following?
Why this Question) The RBI said money multiplier stood at 5.4 in 2020-21, which is marginally below its decennial average (2011-20) of 5.5.
Exp) Option c is correct.
The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital in effect. It measures the impact that a change in economic activity—like investment or spending—will have on the total economic output of something.
Increase in Banking habits of the people can lead to increase in money multiplier in an economy. When a customer makes a deposit into a short-term deposit account, the banking institution can lend one minus the reserve requirement to someone else. While the original depositor maintains ownership of their initial deposit, the funds created through lending are generated based on those funds. If a second borrower subsequently deposits funds received from the lending institution, this raises the value of the money supply even though no additional physical currency actually exists to support the new amount.
Increase in the Cash Reserve Ratio in the banks, increase in the Statutory Liquidity Ratio in the banks and increase in the population of the country will not increase money multiplier.