🧷 Authentic Classroom Explanation | IAS Monk

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📌 The Question:

The money multiplier in an economy increases with which one of the following?
(a) Increase in the Cash Reserve Ratio in the banks
(b) Increase in the Statutory Liquidity Ratio in the banks
(c) Increase in the banking habit of the people
(d) Increase in the population of the country

📌 Correct Answer: (c)

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🧠 Classroom Explanation

🔹 Core Concept: Money Multiplier

The money multiplier measures how much the money supply expands for a given increase in the monetary base.
In its simplest form:

Money Multiplier ≈ 1 / CRR

Thus, anything that reduces cash leakages and keeps money within the banking system increases the multiplier.

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🔍 Option-wise Analysis

• (a) Increase in CRR ❌
  • Higher CRR means banks must keep more money idle as reserves.
  • Less money available for lending → money multiplier falls.
• (b) Increase in SLR ❌
  • Higher SLR forces banks to hold more funds in government securities.
  • Again, less credit creation → lower money multiplier.
• (c) Increase in banking habit of the people ✅
  • More people deposit money in banks instead of holding cash.
  • Lower currency-deposit ratio → more re-depositing → more rounds of lending.
  • This directly increases the money multiplier.
• (d) Increase in population ❌
  • Population growth by itself does not ensure higher deposits or lending.
  • Behaviour matters more than numbers.

📌 Hence, the banking habit of the people is the key driver.

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🧮 Simple Intuition

When people trust banks and deposit money:

• Cash outside banks ↓
• Deposits ↑
• Lending cycles ↑
• Money multiplies faster

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🔍 Curiosity Raiser

Why do countries with high digital payments and low cash usage usually experience stronger monetary transmission?

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🧘 IAS Monk Whisper

Money multiplies not by numbers,
but by trust—
the trust to deposit, not to hoard.