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
Explanation
The correct answer is C, Increase in the banking habit of the people. When people keep more of their money in banks instead of as cash, banks can lend more, so each rupee of reserve money creates more money in the economy. The money multiplier is the ratio of broad money (M3) to reserve money (M0). It depends on two leakages: the cash people hold, measured by the currency–deposit ratio, and the reserves banks must keep, measured by the reserve ratios. The smaller the leakage, the bigger the multiplier. A stronger banking habit lowers the currency–deposit ratio, so more of each rupee returns to banks and is lent again. Option A is wrong because a higher Cash Reserve Ratio makes banks park more money with the RBI, which lowers the multiplier. Option B is wrong because a higher Statutory Liquidity Ratio also locks up more of banks' funds and cuts lending. Option D is wrong because population by itself does not change how much of each deposit banks can lend. Exam tip: more money in banks means a bigger multiplier; a higher CRR or SLR means a smaller one.
Practice Questions
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- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
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Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
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UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
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The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
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GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
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