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

Answer: C. The money multiplier increases with an INCREASE IN THE BANKING HABIT OF THE PEOPLE. THE MONEY MULTIPLIER (m) is the ratio of broad money supply (M3) to the monetary base (M0): m = M3/M0. It indicates how much commercial bank credit expansion can be sustained per unit of high-powered money. Standard money multiplier formula: m = (1 + c) / (c + r), where c = currency-to-deposit ratio and r = reserve-to-deposit ratio (CRR + SLR + excess reserves). For the multiplier to INCREASE, EITHER c (currency ratio) OR r (reserve ratio) must DECREASE. (C) CORRECT. AN INCREASE IN BANKING HABIT means more of the population's money is held in BANK DEPOSITS rather than as cash in hand. This REDUCES THE CURRENCY-DEPOSIT RATIO (c), which INCREASES the money multiplier. More money in the banking system means banks can lend more and create more deposit money through fractional reserve banking. This is the textbook answer. Why other options are WRONG: (A) Higher CRR — REQUIRES BANKS to hold more reserves with the RBI, REDUCING lendable funds, REDUCING the multiplier. Opposite direction. (B) Higher SLR — REQUIRES BANKS to hold more in liquid assets (government securities), REDUCING credit creation capacity, REDUCING the multiplier. Opposite direction. (D) Larger population — has no direct mechanical effect on the multiplier. Population growth might affect demand for money but does not by itself raise the multiplier. Source: NCERT Class 12 Macroeconomics Chapter 'Money and Banking'.