UPSC Prelims 2021 · GS Paper I

Question 11: Economy and Social Development

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

aIncrease in the Cash Reserve Ratio in the banks

bIncrease in the Statutory Liquidity Ratio in the banks

cIncrease in the banking habit of the people

dIncrease in the population of the country

AnswerUPSC’s answer is (c).

The money multiplier is roughly the inverse of the share of deposits that is held back as reserves or cash. If people use banks more, more of their money is deposited and re-lent rather than held as cash, so the multiplier rises. A higher CRR or SLR locks up more deposits, leaving less to lend, so the multiplier falls. Population has no direct link to the multiplier. Remember: more banking habit means a bigger multiplier; higher reserve ratios mean a smaller one.

Why each option is right or wrong

(a) Wrong: a higher CRR raises the reserve share and reduces the multiplier.
(b) Wrong: a higher SLR reduces funds available for lending, lowering the multiplier.
(c) Right: more banking habit means more deposits and less cash held, raising the multiplier.
(d) Wrong: population size does not directly change the multiplier.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.