Q71. 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 habits of the people
d) Increase in the population of the country
Answer – C
- The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital in effect. It measures the impact that a change in economic activity—like investment or spending—will have on the total economic output of something. The money created by the Federal Reserve is the monetary base, also known as high-powered money. Banks create money by making loans. A bank loans or invests its excess reserves to earn more interest. A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar.
- An increase in the Cash Reserve Ratio in the banks, an increase in the Statutory Liquidity Ratio in the banks, and an increase in the population of the country will not increase the money multiplier.
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