Which of the following statements about factors affecting the Money Multiplier (MM) is/are correct? 1. Cash held by individuals acts as a leakage and reduces the money multiplier. 2. Higher reserves held by banks with the RBI increase the money multiplier. 3. A higher Cash Reserve Ratio (CRR) reduces the banking system's capacity to create money.
Only 1 and 3
The money multiplier links the total money supply to the monetary base (high-powered money). It is larger when more of the created money flows back as deposits into banks and smaller when money "leaks" out of the banking loop. The two main leakages are the currency people hold as cash and the reserves banks keep aside.
Statement 1 is correct: cash held by the public (the currency-deposit ratio) is a leakage. Money kept as cash does not return to banks as deposits, so it cannot be re-lent, and this reduces the money multiplier.
Statement 2 is incorrect: when banks keep higher reserves with the RBI, a larger share of each rupee is locked away and a smaller share is available for lending. Higher reserves (a higher reserve-deposit ratio) therefore reduce the money multiplier, not increase it.
Statement 3 is correct: a higher Cash Reserve Ratio (CRR) forces banks to park a bigger fraction of deposits with the RBI, leaving less for credit creation, which lowers the multiplier and shrinks the banking system's money-creating capacity.
Hence, statements 1 and 3 are correct, so the answer is "Only 1 and 3".
Similar Questions
The lead bank scheme was introduced in which year?
Important Questions from Money and Banking
Dr. Urjit Patel, who has been appointed recently as Governor of Reserve Bank of India, was holding which position immediately prior to this appointment?
As per the RBI guidelines, which one of the following is the minimum tenure of Masala Bonds that an Indian company can issue offshore?
______ is a tax system that collects a greater share of income from those with high incomes than from those with lower incomes.
In which year had India's ratio of public debt to GDP gone up to a record 84.2%?
______ is an economic scenario where a peculiar combination of low growth and rising inflation leads to high unemployment.
