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

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

Understanding the Money Multiplier:

The money multiplier reflects how an initial deposit leads to a greater final increase in the total money supply of an economy. Mathematically, the money multiplier ($m$) can be expressed as:

$m=\frac{1+c}{r+c}$

where:
• $c$ is the currency-deposit ratio (the ratio of money held by the public in cash to what they hold in bank deposits).
• $r$ is the reserve ratio (which includes both Cash Reserve Ratio - CRR and Statutory Liquidity Ratio - SLR).

Step-by-Step Logical Analysis:

1. Impact of Banking Habit:
When the banking habit of the population increases, people prefer keeping more money in bank deposits rather than holding cash in hand. This causes the currency-deposit ratio ($c$) to decrease.

2. Effect on Credit Creation:
As more funds enter the formal banking system as deposits, commercial banks have a larger pool of funds available to grant loans and extend credit. This process of re-lending generates secondary deposits, directly increasing the money multiplier.

3. Analysis of Other Options:
• Increase in Cash Reserve Ratio (CRR) / Statutory Liquidity Ratio (SLR): Higher reserve requirements ($r$) force banks to keep a larger portion of their deposits idle or invested in specified liquid assets. This reduces the amount available for lending, thereby decreasing the money multiplier.
• Increase in Population: An increase in population alone does not automatically increase the money supply or lending capacity unless those individuals adopt formal banking habits.

Therefore, an increase in the banking habit of the people boosts bank deposits, enhances credit expansion, and increases the overall money multiplier in the economy.