Question
UPSC Prelims 2019 Question:
The money multiplier in an economy increases with which one of the following?
Answer (Detailed Solution Below)
Option 2: Increase in the banking habit of the population
Detailed Solution
Explanation:
- Money Multiplier is the ratio of money supply (ms) to reserve money (m0).
- Reserve money (m0) is currency held by everybody (Public, Banks, etc.) except Government including the Reserve Bank of India.
- The Money multiplier value depends on the credit creation capacity of the banks, which depends upon
- Monetary Policy
- Banking habits of the people
- If people start depositing more money as fixed deposits in the banks, then banks will have more money for lending purposes. Banks want to lend as much as possible to achieve growth and to earn more profit. Hence banking habits of the people will increase the credit creation capacity of Banks.
Therefore, option (2) is the correct answer.
Subject: Economics | Money and Banking
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