Which one of the following developments would most directly cause the money multiplier in an economy to increase?

Question

Accepted Answer

C. An increase in the banking habit of the population, leading to a higher proportion of transactions routed through bank deposits. An increase in the banking habit of the population means a larger share of money circulating in the economy passes through bank deposits rather than staying as cash outside the banking system, which allows banks to lend and re lend a larger multiple of their reserves, directly raising the money multiplier. Raising the Cash Reserve Ratio or the Statutory Liquidity Ratio forces banks to hold back a larger share of deposits rather than lending them out, which lowers the multiplier, not raises it, and population growth alone does not change how money circulates through the banking system. Since only a rise in banking habit genuinely increases the money multiplier, option C is correct.

Answer

A. A rise in the Cash Reserve Ratio prescribed by the central bank

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B. A rise in the Statutory Liquidity Ratio prescribed by the central bank

Answer

C. An increase in the banking habit of the population, leading to a higher proportion of transactions routed through bank deposits

Answer

D. An increase in the country's total population