Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
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
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
63%
got it right
PROVENANCE & STUDY PATTERN
Full view
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
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

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.
Statement 2
Does an increase in the banking habit of the population increase the money multiplier in an economy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
Presence: 5/5
“• Data on M_0 are published by RBI on weekly basis, while data for M_1 and M_3 are published on fortnightly basis. • Data on L_1 and L_2 are published monthly, while data on L_3 are published quarterly. Ø Money Multiplier - It is the ratio of Broad Money to Reserve Money. It indicates how an initial deposit leads to a greater final increase in the total money supply. Money Multiplier = M_3/M_0 - Money multiplier may be impacted by any change in the components mentioned under M_3 or M_0. Any step to increase M<sub>3</sub> improves the Money Multiplier. Examples include increase in banking habit of people, which can be achieved through better financial inclusion.”
Why this source?
  • Gives the formula Money Multiplier = M3/M0 and frames the multiplier as responsive to changes in components of M3 or M0.
  • States that steps to increase M3 improve the money multiplier.
  • Explicitly cites 'increase in banking habit of people' as an example that raises M3 and thus the multiplier.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
Presence: 4/5
“So, now the first person has money H (H/2 as cash and H/2 in the deposit form) and the second person (P2) has money 0.8 (H/2) i.e. 0.4 H. So, the total money supply in the economy increases from H to H + 0.4H = 1.4H. This has been possible because banks have been given the liberty to keep only a fraction of the deposited money as reserve in their vaults and the rest they can lend to others. (This is called "fractional reserve banking"). So, additional money is getting created through fractional reserve banking.”
Why this source?
  • Explains fractional reserve banking: banks keep only a fraction of deposits as reserves and lend the rest, enabling deposit multiplication.
  • Illustrates how an initial deposit generates successive rounds of deposits and increases total money supply, linking deposit behavior to multiplier effects.
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?
  • Shows that reserve ratios change lending and deposit creation, thereby altering the money supply and the multiplier.
  • Uses the concrete example of increasing the reserve ratio to demonstrate how policy-adjusted reserve requirements affect the multiplier magnitude.
Statement 3
Does an increase in the statutory liquidity ratio (SLR) increase the money multiplier in an economy?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"the size of the money multiplier is determined by the required reserve ratio (r) at the central bank, the excess reserve ratio (e ) of commercial banks and the currency ratio (c) of the public. The lower these ratios are, the larger the money multiplier is."
Why this source?
  • Explains what determines the money multiplier: required reserve ratio (r), excess reserve ratio (e) and currency ratio (c).
  • States that lower values of these ratios produce a larger money multiplier—so increasing a reserve requirement (r) would work in the opposite direction (reduce the multiplier).
Web source
Presence: 4/5
"the cash Reserve ratio (CRR) and statutory Liquidity ratio (SLR) play pivotal roles here by ensuring that banks maintain a certain percentage of their deposits in [cash and liquid assets], respectively."
Why this source?
  • States that SLR requires banks to maintain a certain percentage of deposits in cash and liquid assets.
  • By requiring banks to hold a percentage of deposits as liquid assets, SLR effectively increases the portion of deposits not available for lending (i.e., raises required/locked reserves).

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
Strength: 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 relevant

Defines SLR as a reserve requirement that limits the amount of deposits banks can use to give loans; explicitly states the reserve ratio acts as a limit to credit creation.

How to extend

A student can combine this with the basic fact that the money multiplier rises when banks create more credit (loans) to infer higher SLR likely reduces, not increases, the multiplier.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
Strength: 5/5
“• Data on M_0 are published by RBI on weekly basis, while data for M_1 and M_3 are published on fortnightly basis. • Data on L_1 and L_2 are published monthly, while data on L_3 are published quarterly. Ø Money Multiplier - It is the ratio of Broad Money to Reserve Money. It indicates how an initial deposit leads to a greater final increase in the total money supply. Money Multiplier = M_3/M_0 - Money multiplier may be impacted by any change in the components mentioned under M_3 or M_0. Any step to increase M<sub>3</sub> improves the Money Multiplier. Examples include increase in banking habit of people, which can be achieved through better financial inclusion.”
Why relevant

Gives the money multiplier formula (Money Multiplier = M3/M0) and notes that any step that increases M3 (e.g., more banking/credit) raises the multiplier.

How to extend

Using the rule that SLR restricts credit (from other snippets), a student can reason that higher SLR would lower M3 and thus lower the multiplier.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > National Income Identity for an Open Economy > p. 104
Strength: 4/5
“Speculative demand Demand for money as a store of wealth. Statutory Liquidity Ratio (SLR) The fraction of their total demand and time deposits which the commercial banks are required by RBI to invest in specified liquid assets. Sterilisation Intervention by the monetary authority of a country in the money market to keep the money supply stable against exogenous or sometimes external shocks such as an increase in foreign exchange inflow. Stocks Those variables which are defined at a point of time.”
Why relevant

Provides a concise definition of SLR as the fraction of deposits banks must invest in specified liquid assets, framing SLR as a constraint on deployable funds.

How to extend

A student can link this constraint to reduced capacity for loan creation and so test the effect on the multiplier using the multiplier formula.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > INCREMENTAL CASH RESERVE RATIO > p. 169
Strength: 4/5
“MCLR requires banks to charge interest rates based on marginal cost or incremental cost incurred by the banks to obtain the funds while the base rate was based on the average cost of funds. • Name of Instrument: Cash Reserve Ratio (CRR); In Order to Reduce Inflation: Increase CRR; In Order to Increase Economic Growth: Decrease CRR • Name of Instrument: Statutory Liquidity Ratio (SLR); In Order to Reduce Inflation: Increase SLR; In Order to Increase Economic Growth: Decrease SLR • Name of Instrument: Repo Rate (RR); In Order to Reduce Inflation: Increase RR; In Order to Increase Economic Growth: Decrease RR • Name of Instrument: Reverse Repo Rate (RRR); In Order to Reduce Inflation:”
Why relevant

Lists policy use of SLR: increasing SLR is a tool to reduce inflation (i.e., a contractionary measure), implying it tightens liquidity and credit.

How to extend

Combine the contractionary role with the multiplier formula to infer that tighter liquidity from higher SLR would tend to lower the money multiplier.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > 3.1 History of Indian Banking and Reforms > p. 126
Strength: 3/5
“In addition to the nationalization of banks, the priority sector lending targets raised to 40% from 33.3%. Besides the establishment of priority sector credits and nationalization of banks, the government took further control over banks funds by raising the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR). From a level of 2% for the CRR and 25% for the SLR in 1960, both witnessed a steep increase until 1991 to 15% and 38.5% respectively. In the period of 1969 to 1991, bank branches increased a lot but banks remained unprofitable, inefficient, and unsound owing to their poor lending strategy and lack of internal risk management under government ownership.”
Why relevant

Historical note that raising SLR (and CRR) gave the government more control over banks' funds, decreasing funds available for lending.

How to extend

A student can use this historical pattern plus the concept that less lending reduces broad money (M3) to argue higher SLR likely reduces the multiplier.

Statement 4
Does an increase in the population of the country increase the money multiplier in an economy?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"To summarise the money multiplier approach, the size of the money multiplier is determined by the required reserve ratio (r) at the central bank, the excess reserve ratio (e ) of commercial banks and the currency ratio (c) of the public. The lower these ratios are, the larger the money multiplier is."
Why this source?
  • Explicitly lists the determinants of the money multiplier as reserve ratios and the public's currency ratio, not population.
  • States that lower reserve/excess reserve/currency ratios produce a larger money multiplier, implying structural ratios, not population size, drive multiplier changes.
  • By omission, indicates population per se is not a direct parameter in the multiplier formula.
Web source
Presence: 4/5
"Thus, the higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier. If some portion of the increase in high-powered money finds its way into currency, this portion does not undergo multiple deposit expansion."
Why this source?
  • Explains how changes in reserve behaviour and the portion of funds held as cash affect the multiplier (higher reserve ratio → smaller multiplier).
  • Shows that whether funds are held as deposits or cash (behavioral ratios) matters for multiplier size — again not population count itself.
  • Supports the point that money-holding and banking/reserve practices determine multiplier magnitude.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
Strength: 5/5
“• Data on M_0 are published by RBI on weekly basis, while data for M_1 and M_3 are published on fortnightly basis. • Data on L_1 and L_2 are published monthly, while data on L_3 are published quarterly. Ø Money Multiplier - It is the ratio of Broad Money to Reserve Money. It indicates how an initial deposit leads to a greater final increase in the total money supply. Money Multiplier = M_3/M_0 - Money multiplier may be impacted by any change in the components mentioned under M_3 or M_0. Any step to increase M<sub>3</sub> improves the Money Multiplier. Examples include increase in banking habit of people, which can be achieved through better financial inclusion.”
Why relevant

Defines money multiplier as M3/M0 and states that increasing M3 (e.g., via greater banking habits) raises the multiplier.

How to extend

A student can ask whether population growth raises deposits (M3) relative to reserve money (M0) — if yes, the multiplier may rise.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 19: Population and Demographic Dividend > Benefits of Demographic Dividend > p. 572
Strength: 4/5
“• Savings and investments across the country increase, which automatically generate capital resources. Higher the demographic dividend, larger the surplus available for investment for a country, which results in wealth accumulation. • Lowering of taxes may also be one of the benefits when demographic window of a country increases because the proportion of working age also increases.”
Why relevant

States that a larger working-age population raises savings and investments, generating larger surpluses available for investment.

How to extend

Combine this with the money-multiplier rule: more national savings could increase bank deposits (M3), potentially increasing the multiplier if reserves (M0) do not rise proportionally.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 160
Strength: 3/5
“Indian Economy From mid-1990s to 2016-17, the money multiplier was mostly increasing. However, it has been declining since 2017-18. However, in 2019-20 and 2020-21 (up to January 2021), the money multiplier has recorded a slight decline, reflecting large deposits by banks with RBI under reverse repo.”
Why relevant

Notes the money multiplier responds to changes in deposit behaviour (example: large deposits with RBI under reverse repo reduced the multiplier recently).

How to extend

Use this to check whether population-driven deposit increases would actually be held as bank deposits or parked with RBI — the destination of deposits matters for the multiplier effect.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 2020 > p. 247
Strength: 2/5
“Which of the statements given above is/are correct? • (b) 1 and 2 only • (a) 1 only • (d) 1, 2 and 3 • (c) 3 only • 12. The money multiplier in an economy increases with which one of the following? • (a) Increase in the Cash Reserve Ratio • (b) Increase in the banking habit of population • (c) Increase in the statutory liquidity ratio • (d) Increase in the population of the country”
Why relevant

Presents an exam question listing 'increase in population of the country' as a possible factor affecting the money multiplier.

How to extend

Interpret this as a prompt to evaluate the mechanism: whether population growth changes M3 or M0 and through which channels (banking habits, reserves, regulation).

Pattern takeaway: UPSC Economy questions prioritize 'Functional Relationships' (If X rises, does Y rise or fall?) over static definitions. The pattern is to test the *denominator* of economic formulas. If you know the formula, you can derive the answer without guessing.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from NCERT Class XII Macroeconomics (Chapter 3: Money and Banking) and standard texts like Vivek Singh or Nitin Singhania.
  2. [THE CONCEPTUAL TRIGGER]: The 'Money Creation' or 'Credit Creation' cycle in the Banking System. Specifically, the formula: Money Multiplier = (1 + Currency Deposit Ratio) / (Currency Deposit Ratio + Reserve Deposit Ratio).
  3. [THE HORIZONTAL EXPANSION]: Memorize the determinants: 1) Currency-Deposit Ratio (CDR) - inverse relation; 2) Reserve-Deposit Ratio (RDR) - inverse relation; 3) Excess Reserves - inverse relation; 4) High Powered Money (H or M0) - direct relation to total supply but base for multiplier. Contrast this with 'Velocity of Money'.
  4. [THE STRATEGIC METACOGNITION]: Do not just memorize 'Multiplier = 1/CRR'. That is a simplified case. You must understand the *behavioral* aspect: The multiplier depends on the public's willingness to deposit money (Banking Habit) and the bank's ability to lend (Reserves). If people hoard cash, the multiplier collapses.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Reserve-deposit ratio (rdr) and the money multiplier
💡 The insight

The money multiplier is determined by the currency-deposit ratio and the reserve-deposit ratio, and the reserve-deposit ratio includes CRR.

High-yield for monetary policy questions: mastering this enables calculation of multiplier effects and direct reasoning about how CRR/SLR changes affect money supply, inflation and liquidity. Links to topics on RBI tools, credit creation and macro stabilization policies; useful for both numerical problems and conceptual UPSC questions.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 59
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
🔗 Anchor: "Does an increase in the cash reserve ratio (CRR) increase the money multiplier i..."
📌 Adjacent topic to master
S1
👉 CRR as a quantitative tool to control money supply
💡 The insight

CRR sets the fraction of deposits that must be held as reserves, directly limiting funds available for lending and money creation.

Frequently tested in GS and economics: explains how RBI uses CRR to curb inflation or manage liquidity. Connects to questions on instruments of monetary policy, credit control, and banking operations; essential for evaluating policy impact and answering MCQs and mains explanations.

📚 Reading List :
  • 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
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 4. Reserve Requirements > p. 167
🔗 Anchor: "Does an increase in the cash reserve ratio (CRR) increase the money multiplier i..."
📌 Adjacent topic to master
S2
👉 Money multiplier = M3 / M0 (calculation and interpretation)
💡 The insight

The money multiplier is a ratio of broad money to reserve money and changes when components of M3 or M0 change.

High-yield for policy and macro questions: knowing the formula lets candidates evaluate how shifts in deposits, reserves or monetary policy affect money supply. Connects to topics on monetary aggregates, RBI operations, and questions on causes/effects of changes in money supply.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
🔗 Anchor: "Does an increase in the banking habit of the population increase the money multi..."
📌 Adjacent topic to master
S2
👉 Banking habit and financial inclusion as a driver of deposits
💡 The insight

Greater banking habit increases deposit mobilisation (M3), which raises the money multiplier by enlarging the base available for successive lending.

Important for questions linking financial inclusion and macroeconomy: shows how social/policy efforts to increase banking participation influence money supply and credit creation. Enables argumentation in essay and GS papers on development policy and monetary transmission.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
🔗 Anchor: "Does an increase in the banking habit of the population increase the money multi..."
📌 Adjacent topic to master
S2
👉 Fractional reserve banking and reserve ratios' effect on money creation
💡 The insight

Banks lend out a fraction of deposits, so reserve requirements (CRR) and lending behaviour determine how much initial deposits multiply into broad money.

Essential for understanding monetary policy instruments and their impact on credit and inflation. Links central bank tools (CRR, reverse repo) to practical outcomes in money supply and helps answer direct questions on how policy changes alter the multiplier.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
🔗 Anchor: "Does an increase in the banking habit of the population increase the money multi..."
📌 Adjacent topic to master
S3
👉 Statutory Liquidity Ratio (SLR): definition and effect on bank lending
💡 The insight

SLR is the share of deposits banks must keep in liquid assets; a higher SLR reduces the funds banks can lend and thus constrains credit creation.

High-yield for monetary policy questions: explains how reserve requirements directly limit banks' ability to create credit, links to inflation control and banking sector liquidity. Mastery helps answer questions on transmission of policy to money supply and credit availability.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
  • 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
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Quantitative Measures > p. 72
🔗 Anchor: "Does an increase in the statutory liquidity ratio (SLR) increase the money multi..."
📌 Adjacent topic to master
S3
👉 Money Multiplier: formula and key determinants
💡 The insight

Money multiplier equals broad money divided by reserve money and rises when broad money (M3) increases or when reserve constraints are relaxed.

Fundamental for questions on money supply mechanics: understanding the formula and determinants (reserve ratios, banking habits, components of M3/M0) enables one to evaluate how policy changes affect total money in economy.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
  • 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
🔗 Anchor: "Does an increase in the statutory liquidity ratio (SLR) increase the money multi..."
🌑 The Hidden Trap

The 'Currency Deposit Ratio' (CDR). While 'Banking Habit' increases the multiplier, an increase in CDR (people holding more cash vs deposits, e.g., during a pandemic or demonetization panic) decreases the money multiplier. This is the exact mathematical inverse of the question asked.

⚡ Elimination Cheat Code

Use the 'Constraint vs. Enabler' logic. CRR (A) and SLR (C) are regulatory *constraints*—increasing them restricts banks, so they logically reduce the multiplier. Population (D) is a 'Trap of Scale'—a billion people with no banks have a multiplier of 1. Only Banking Habit (B) is an *enabler* of the circulation process required for multiplication.

🔗 Mains Connection

Mains GS-3 (Inclusive Growth): Connect 'Banking Habits' to PM Jan Dhan Yojana. Financial inclusion isn't just social welfare; it is a macroeconomic tool to increase the Money Multiplier, thereby expanding credit availability for national infrastructure and capital formation without printing new currency.

✓ Thank you! We'll review this.

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?