{"id":1686,"date":"2024-03-28T18:54:15","date_gmt":"2024-03-28T13:24:15","guid":{"rendered":"https:\/\/lotusarise.com\/qna\/?p=1686"},"modified":"2024-04-03T07:17:49","modified_gmt":"2024-04-03T01:47:49","slug":"q-the-money-multiplier-in-an-economy-increases-with-which-one-of-the-following","status":"publish","type":"post","link":"https:\/\/lotusarise.com\/qna\/upsc\/q-the-money-multiplier-in-an-economy-increases-with-which-one-of-the-following","title":{"rendered":"Q. The money multiplier in an economy increases with which one of the following?"},"content":{"rendered":"\n<ul class=\"mcq wp-block-list\">\n<li>Increase in the Cash Reserve Ratio in the banks.<\/li>\n\n\n\n<li>Increase in the Statutory Liquidity Ratio in the banks<\/li>\n\n\n\n<li>Increase in the banking habit of the people<\/li>\n\n\n\n<li>Increase in the population of the country<\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><strong>Answer: c) Increase in the banking habit of the people<\/strong><\/p>\n<\/blockquote>\n\n\n\n<h5 class=\"wp-block-heading\" id=\"money-multiplier\">Money multiplier<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Money multiplier is a term in&nbsp;<strong>monetary economics<\/strong>&nbsp;that is a phenomenon of creating money in the economy in the form of credit creation, which is based on the<strong>&nbsp;fractional reserve banking system<\/strong>.<\/li>\n\n\n\n<li>In monetary economics, the money multiplier is the&nbsp;<strong>ratio of the money supply to the monetary base<\/strong>&nbsp;(i.e. central bank money).<\/li>\n\n\n\n<li>Money multiplier is also known as the monetary multiplier.&nbsp;<strong>It is the maximum limit to which money supply can be affected by bringing about changes in the amount of money deposits<\/strong>.<\/li>\n\n\n\n<li>The money multiplier effect is seen in commercial banks as they accept deposits, and after keeping a certain amount as a reserve, they distribute the money as loans for injecting liquidity in the economy.<\/li>\n\n\n\n<li>The amount of money that should be kept by commercial banks in their reserve for withdrawal purposes by the customers is referred to as the&nbsp;<strong>reserve ratio, required reserve ratio, or cash reserve ratio<\/strong>.<\/li>\n\n\n\n<li>Mathematically, money multiplier formula can be represented as follows:\n<ul class=\"wp-block-list\">\n<li><strong>Money multiplier = 1\/r<\/strong>\n<ul class=\"wp-block-list\">\n<li>Where:&nbsp;<strong>r = Required reserve ratio<\/strong>&nbsp;or cash reserve ratio<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>It means that&nbsp;<strong>if the reserve ratio is higher, then the money multiplier will be lower<\/strong>&nbsp;and the banks need to keep more reserves. As a result, they will not be able to lend more money to individuals and businesses.<\/li>\n\n\n\n<li>Similarly, a&nbsp;<strong>lower reserve ratio results in a higher money multiplier<\/strong>&nbsp;that allows a lesser amount of money to be kept as a reserve and more lending opportunities to the public.<\/li>\n\n\n\n<li>The multiplier will depend on the\u00a0<strong>preferences of households, the legal regulation and the business policies of commercial banks<\/strong>.\n<ul class=\"wp-block-list\">\n<li>An&nbsp;<strong>increase in banking activity will lead to more money in the bank\u2019s hands in the form of Time Deposits (FD, RD), Demand Deposits (Savings Bank Account), Cash, etc, thus increase in banking habits of the people will increase the money multiplier<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h6 class=\"wp-block-heading\" id=\"multiplier-effect\">Multiplier Effect<\/h6>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The multiplier effect is an economic term, referring to&nbsp;<strong>the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital.<\/strong><\/li>\n\n\n\n<li>In effect, Multipliers effects measure the impact that a&nbsp;<strong>change in economic activity<\/strong>&nbsp;\u2014 like investment or spending\u2014will have on the total economic output of something.<\/li>\n\n\n\n<li>This amplified effect is known as the multiplier.<\/li>\n<\/ul>\n\n\n\n<h6 class=\"wp-block-heading\" id=\"surplus-liquidity\">Surplus Liquidity<\/h6>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Surplus liquidity occurs where\u00a0<strong>cashflows into the banking system persistently exceed withdrawals of liquidity<\/strong><strong>from the market<\/strong>\u00a0by the central bank.\n<ul class=\"wp-block-list\">\n<li>Liquidity in the banking system refers&nbsp;<strong>to readily available cash<\/strong>&nbsp;that banks need to meet short-term business and financial needs.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Causes of Increased Liquidity:<\/strong>\n<ul class=\"wp-block-list\">\n<li><strong>Advance tax<\/strong>&nbsp;and&nbsp;<strong>goods and services tax (GST)<\/strong>&nbsp;payments,<\/li>\n\n\n\n<li>The deposit of withdrawn Rs 2,000 notes,<\/li>\n\n\n\n<li>Redemption of government bonds,<\/li>\n\n\n\n<li>Higher government spending,<\/li>\n\n\n\n<li>The sale of dollars by the RBI to defend the rupee from depreciation.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Impact of Increased liquidity:<\/strong>\n<ul class=\"wp-block-list\">\n<li>It may lead to increased levels of&nbsp;<strong>inflation.<\/strong><\/li>\n\n\n\n<li>Interest rates in the market will remain low.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>RBI\u2019s Measures:<\/strong>\n<ul class=\"wp-block-list\">\n<li>The RBI takes action if liquidity levels deviate from its comfort range.<\/li>\n\n\n\n<li>The RBI, under its\u00a0<strong>Liquidity Adjustment Facility,<\/strong>\u00a0infuses liquidity in the banking system via\u00a0<strong>repos<\/strong>\u00a0and sucks it out using\u00a0<strong>reverse repos<\/strong>\u00a0after assessing liquidity conditions.\n<ul class=\"wp-block-list\">\n<li>The RBI also uses a 14-day&nbsp;<strong>variable rate repo and\/or reverse repo operation<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/lotusarise.com\/wp-content\/uploads\/2024\/02\/Tools-Used-by-RBI-to-control-Money-Supply.webp\" alt=\"Tools Used by RBI to control Money Supply\" class=\"wp-image-48769\" title=\"Upsc prelims research: indian economy 2021 1\"\/><\/figure>\n<\/div>\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"The Money Multiplier\" width=\"720\" height=\"405\" src=\"https:\/\/www.youtube.com\/embed\/93_Va7I7Lgg?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Answer: c) Increase in the banking habit of the people Money multiplier Multiplier Effect Surplus Liquidity<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_kad_blocks_custom_css":"","_kad_blocks_head_custom_js":"","_kad_blocks_body_custom_js":"","_kad_blocks_footer_custom_js":"","_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[1,3],"tags":[38],"years":[52],"class_list":["post-1686","post","type-post","status-publish","format-standard","hentry","category-upsc","category-prelims","tag-indian-economy","years-52"],"acf":[],"taxonomy_info":{"category":[{"value":1,"label":"UPSC"},{"value":3,"label":"Prelims"}],"post_tag":[{"value":38,"label":"Indian Economy"}],"years":[{"value":52,"label":"2021"}]},"featured_image_src_large":false,"author_info":{"display_name":"LotusArise","author_link":"https:\/\/lotusarise.com\/qna\/author\/team-lotusarise"},"comment_info":0,"category_info":[{"term_id":1,"name":"UPSC","slug":"upsc","term_group":0,"term_taxonomy_id":1,"taxonomy":"category","description":"","parent":0,"count":1269,"filter":"raw","cat_ID":1,"category_count":1269,"category_description":"","cat_name":"UPSC","category_nicename":"upsc","category_parent":0},{"term_id":3,"name":"Prelims","slug":"prelims","term_group":0,"term_taxonomy_id":3,"taxonomy":"category","description":"","parent":1,"count":1251,"filter":"raw","cat_ID":3,"category_count":1251,"category_description":"","cat_name":"Prelims","category_nicename":"prelims","category_parent":1}],"tag_info":[{"term_id":38,"name":"Indian Economy","slug":"indian-economy","term_group":0,"term_taxonomy_id":38,"taxonomy":"post_tag","description":"","parent":0,"count":225,"filter":"raw"}],"_links":{"self":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1686","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/comments?post=1686"}],"version-history":[{"count":0,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1686\/revisions"}],"wp:attachment":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/media?parent=1686"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/categories?post=1686"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/tags?post=1686"},{"taxonomy":"years","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/years?post=1686"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}