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Sunday, 2 June 2019

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

  By GK Planet Team       Sunday, 2 June 2019
Q. The money multiplier in an economy increases with which one of the following?
  1. Increase in the cash reserve ratio
  2. Increase in the banking habit of the population
  3. Increase in the statutory liquidity
  4. Increase in the population of the country
Answer: Increase in the banking habit of the population
The money multiplier, sometimes called the monetary multiplier, measures the effect that a change in banks' required reserves has on the overall money supply of an economy.
In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking system. In one version it measures the maximum amount of commercial bank money that can be created, given a certain amount of central bank money and ignoring leakages into currency held by the non-bank public. That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) when there are no leakages is equal to a multiple of the amount of reserves. This multiple is the reciprocal of the reserve ratio, and it is an economic multiplier. The actual ratio of money to central bank money also called the money multiplier, is lower because some funds are held by the non-bank public as currency and most banks hold excess reserves (reserves above the amount required by the central bank).
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