UPSC Prelims 2019 GS Paper I · Q90 of 100 Economy medium

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

  1. (a) Increase in the cash reserve ratio
  2. (b) Increase in the banking habit of the population ✓ UPSC's answer
  3. (c) Increase in the statutory liquidity ratio
  4. (d) Increase in the population of the country

Why the answer is (b)

• The money multiplier (broad money ÷ reserve money) rises when a larger share of money circulates through banks as deposits that can be re-lent.

• A stronger banking habit means people hold less currency and more deposits, lowering the currency-deposit ratio and raising the multiplier — option (b).

• Higher CRR (a) and SLR (c) lock up bank funds and reduce lending, lowering the multiplier; population size (d) has no direct effect.

• Hence option (b).

Why the other options are wrong

(a) Increase in the cash reserve ratio
Higher CRR reduces the multiplier.
(c) Increase in the statutory liquidity ratio
Higher SLR reduces lendable funds and the multiplier.
(d) Increase in the population of the country
Population has no direct effect on the multiplier.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2019, held on 2 June 2019. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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