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Q90 (IAS/2019) Economy › Money, Banking & Inflation › Monetary aggregates Official Key

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

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is option B. The size of the money multiplier is determined by the required reserve ratio at the central bank, the excess reserve ratio of commercial banks and the currency ratio of the public, and the lower these ratios are, the larger the money multiplier is.[1] Any step to increase M₃ improves the Money Multiplier, and examples include increase in banking habit of people, which can be achieved through better financial inclusion.[2] When people deposit more money in banks rather than holding cash, the currency-deposit ratio falls, allowing banks to create more credit through fractional reserve banking.

Options A and C are incorrect because the statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create[3], and the higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier.[4] Option D is incorrect as population increase alone does not directly affect the money multiplier, which depends on banking behavior and reserve requirements rather than demographic factors.

Sources
  1. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
  2. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
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Q. The money multiplier in an economy increases with which one of the following? [A] Increase in the cash reserve ratio [B] Increase in th…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10
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This is a classic 'Conceptual Mechanism' question. It moves beyond defining terms (like CRR or SLR) to testing your understanding of how they interact dynamically. It is a direct hit from NCERT Macroeconomics Class XII (Chapter 3), making it a high-fairness 'Sitter' for anyone who studied the logic of credit creation rather than just memorizing rates.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Does an increase in the cash reserve ratio (CRR) increase the money multiplier in an economy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 5/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Defines CRR as the percentage of deposits banks must keep as cash reserves.
  • Gives a numerical example: with CRR = 20%, only 80% of deposits are available for lending.
  • Explicitly says the reserve ratio acts as a limit on the amount of credit banks can create, so a higher CRR reduces credit creation and the multiplier.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 59
Presence: 4/5
“This is represented in the following table: Public | Public P1 | H/2 | 0.2 (H/2) | H/2 | H P2 | 1/2(0.8 (H/2)) | 0.2/2 (0.8 (H/2)) | 1/2(0.8 (H/2)) | 0.8 (H/2) P4 Sum | 1/2 (5H/3) | 0.2/2 (5H/3) | 1/2 (5H/3) | 5H/3 So, with H monetary base and H money supply initially, the RBI has been able to increase/create the money supply to 5H/3 through fractional reserve banking. So, money supply is now 5/3 times of the monetary base, hence the money multiplier is 5/3. The value of the money multiplier depends on two variables: • currency-deposit ratio (cdr); and• reserves-deposit ratio (rdr) which is equal to required reserves plus excess reserves While currency deposit ratio depends on the behaviour of the public, the reserve deposit ratio depends on RBI regulations on CRR and SLR.”
Why this source?
  • Explains money multiplier depends on currency-deposit ratio and reserve-deposit ratio (rdr).
  • Clarifies rdr equals required reserves plus excess reserves and that rdr depends on CRR and SLR.
  • Implies that raising CRR raises rdr and thus lowers the money multiplier (inverse relationship).
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
Presence: 4/5
“Quantitative tools, control the extent of money supply by changing the CRR, or bank rate or open market operations. Qualitative tools include persuasion by the Central bank in order to make commercial banks discourage or encourage lending which is done through moral suasion, margin requirement, etc. It should be evident by now that if the Central bank changes the reserve ratio, this would lead to changes in lending by the banks which, in turn, would impact the deposits and hence, the money supply. In the previously discussed example, what would the money multiplier be if the RBI increases the reserve ratio to 25 per cent?”
Why this source?
  • Identifies reserve ratio as a quantitative tool that changes lending and thereby impacts deposits and money supply.
  • Poses the direct question of how the money multiplier changes when the reserve ratio is increased, linking higher reserve ratios to reduced multiplier.
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SIMILAR QUESTIONS

IAS · 2021 · Q21 Relevance score: 8.22

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

CDS-II · 2023 · Q120 Relevance score: 0.65

What would be the impact on the economy if people start holding more currency in hand and less in deposits?

IAS · 2012 · Q2 Relevance score: -0.55

Which of the following measures would result in an increase in the money supply in the economy? 1. Purchase of government securities from the public by the Central Bank 2. Deposit of currency in commercial banks by the public 3. Borrowing by the government from the Central Bank 4. Sale of government securities to the public by the Central Bank Select the correct answer using the codes given below :

IAS · 2010 · Q110 Relevance score: -0.85

When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean?

CAPF · 2018 · Q110 Relevance score: -1.02

. Multipliers will be lower with which one of the following?