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

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

Understanding Money Multiplier:

The money multiplier reflects the maximum amount of commercial bank money that can be created by a given amount of central bank money (base money). It measures how an initial deposit leads to a greater final increase in the total money supply within an economy.

Mathematically, the simple money multiplier (m) is expressed as:

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

where:

• c is the currency-deposit ratio (the proportion of money people keep in cash relative to bank deposits).
• r is the reserve ratio (the proportion of total deposits commercial banks are required or choose to hold as reserves, including Cash Reserve Ratio and Statutory Liquidity Ratio).

Step-by-Step Analysis of the Options:

1. Increase in the banking habit of the population:
When people develop stronger banking habits, they hold less money as physical cash and deposit more into commercial banks. This decreases the currency-deposit ratio (c). As more money enters the banking system as deposits, banks have more funds available to extend loans, thereby increasing credit creation and expanding the overall money multiplier.

2. Increase in the cash reserve ratio (CRR) / Statutory Liquidity Ratio (SLR):
An increase in mandatory reserve ratios (r) forces banks to keep a larger fraction of their deposits locked with the central bank or in liquid assets. This leaves less money available for banks to lend out, which decreases credit creation and reduces the money multiplier.

3. Increase in the population of the country:
A simple increase in population does not automatically change the proportional credit creation mechanism or the money multiplier unless the banking habits and deposit patterns of the individuals change.

Therefore, an increase in the banking habit of the population increases the money multiplier in an economy.