The money multiplier in an economy increases with which one of the following?
Correct Answer: Option C
The money multiplier indicates how much the money supply increases for every rupee increase in the monetary base.
Cash Reserve Ratio (CRR) is the percentage of a bank's total deposits it must maintain as cash reserves with the RBI.
Statutory Liquidity Ratio (SLR) is the percentage of a bank's Net Demand and Time Liabilities (NDTL) it must maintain in liquid assets like government securities.
The money multiplier is calculated as 1/CRR. An increase in CRR or SLR reduces the amount of money available for banks to lend, thus decreasing the money multiplier.
Increased banking habits of the people leads to lower cash deposit ratio and hence an increase in the money multiplier.
For Example: Suppose a bank receives a deposit of Rs. 100 and the CRR is 20%. The bank can lend Rs. 80. This loan becomes a deposit in another bank, which can then lend a portion of it, and so on. This process continues until the initial deposit creates a larger amount of money in the economy.
Hence, the correct option is c.