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Q21 (IAS/2021) 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: C
Explanation

The correct answer is Option 3: Increase in the banking habit of the people.

The money multiplier represents the maximum amount of broad money the banking system generates with each rupee of the monetary base. It is mathematically expressed as m = 1/r, where 'r' is the reserve ratio.

  • Option 3 is correct because an increase in banking habits leads to more deposits. When people deposit more money rather than holding cash, banks have a larger pool of funds to lend out. This cycle of lending and redepositing expands the money supply, thereby increasing the multiplier.
  • Options 1 and 2 are incorrect because an increase in CRR or SLR forces banks to keep more liquid assets or cash with the RBI. This reduces the funds available for lending, which decreases the money multiplier.
  • Option 4 is incorrect because population growth does not automatically translate into credit creation unless accompanied by financial inclusion and banking activity.
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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 in the banks [B] I…
At a glance
Origin: Books + Current Affairs Fairness: Low / Borderline fairness Books / CA: 2.5/10 · 7.5/10
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This is a conceptual 'Sitter' derived directly from NCERT Class XII Macroeconomics (Chapter 3). It tests the fundamental formula of the Money Multiplier ($m = \frac{1}{CDR + RDR}$). The strategy is simple: master the variables in the formula—if reserves (CRR/SLR) go up, the multiplier goes down; if people deposit more (banking habit), the multiplier goes up.

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) in banks increase the money multiplier in an economy?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"= 1 ÷ R** Using this equation, you’ll find that a higher reserve ratio means a lower money multiplier, and likewise, a lower reserve ratio means a higher money multiplier."
Why this source?
  • Explicitly states the inverse relationship between the reserve ratio and the money multiplier.
  • Provides the direct conclusion that a higher reserve ratio yields a lower money multiplier.
Web source
Presence: 5/5
"The money multiplier is 1 ÷ R, being the inverse of the reserve ratio."
Why this source?
  • Gives the money-multiplier formula showing it is the inverse of the reserve ratio.
  • Directly ties the multiplier's size to the reserve requirement (R).
Web source
Presence: 5/5
"A higher reserve requirement reduces the amount available for lending, shrinking the money multiplier."
Why this source?
  • Explains that a higher reserve requirement reduces funds available for lending.
  • States that reduced lending 'shrinks the money multiplier', linking CRR increases to a lower multiplier.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 59
Strength: 5/5
“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 relevant

States the money multiplier depends on the currency-deposit ratio and the reserves-deposit ratio (rdr), and notes rdr depends on regulations on CRR and SLR.

How to extend

A student can combine this with the basic fact that higher CRR raises required reserves (rdr) to infer higher CRR will change the multiplier (likely reduce it).

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 CRR as the percentage of deposits banks must keep as cash reserves and shows that higher CRR reduces the portion of deposits available for lending.

How to extend

Using the lending multiplier logic (less loanable funds → fewer deposit creation rounds), a student can infer higher CRR should lower the money multiplier.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
Strength: 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 relevant

Explains central bank quantitative tools include changing the reserve ratio and explicitly links changing the reserve ratio to changes in lending, deposits and hence money supply; poses a numeric example when reserve ratio is increased.

How to extend

A student could work through the numeric example (e.g., computing multiplier for different reserve ratios) to test whether raising CRR raises or lowers the multiplier.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.12 Money Creation > p. 58
Strength: 4/5
“20 as reserve money and the rest Rs. 80 they can lend to someone else. Banks can keep the reserves either with themselves (SLR) or with RBI (CRR). So, rdr is sum of CRR and SLR. Now we will understand the mechanism of money creation by monetary authority i.e. RBI. Suppose RBI wishes to increase the money supply in the economy. Let us assume that RBI purchases some assets, say, government bonds or gold worth Rs. H from the market and in turn issues the currency note worth Rs. H to that person (P1). So, in this situation, money supply is H and monetary base is also H.”
Why relevant

Notes that reserves can be kept as CRR or SLR and that rdr is the sum of CRR and SLR, tying CRR quantitatively into the reserve-deposit ratio which affects money creation.

How to extend

A student could treat CRR as a component of rdr and recalc the theoretical multiplier formula (1/(cdr + rdr)) to see how an increase in CRR shifts the multiplier.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Note: > p. 159
Strength: 3/5
“• 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 formal definition Money Multiplier = M3/M0 and states the multiplier may be impacted by any change in components of M3 or M0 (e.g., banking habits).

How to extend

A student can reason that increasing CRR alters reserve money (part of M0 or affects bank lending that determines M3), so computing effects on M3 and M0 would show the direction of multiplier change.

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Statement analysis

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SIMILAR QUESTIONS

IAS · 2019 · Q90 Relevance score: 7.89

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

IAS · 2010 · Q110 Relevance score: 0.45

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

CDS-II · 2023 · Q120 Relevance score: 0.25

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

CDS-I · 2010 · Q75 Relevance score: 0.00

Consider the following statements with regard to Statutory Liquidity Ratio (SLR): 1. To meet SLR, commercial banks can use cash only. 2. SLR is maintained by the banks with themselves. 3. SLR restricts the banks' leverage in pumping more money into the economy. Which of the statements given above is/are correct ?

IAS · 2012 · Q2 Relevance score: -0.12

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 :