Correct Option (c)
The money multiplier indicates the extent to which the money supply in an economy expands for each unit increase in the monetary base. It is inversely related to the reserve ratio and the currency deposit ratio (the proportion of money people hold as cash relative to deposits). An increase in the banking habit of the people signifies that individuals prefer to deposit a larger share of their money in banks rather than holding it as physical currency. This behavior reduces the currency deposit ratio. When the currency deposit ratio decreases, the denominator of the money multiplier formula (which includes this ratio) becomes smaller, leading to an increase in the overall money multiplier. Consequently, banks have more funds available for lending, facilitating greater credit creation and a larger expansion of the money supply.
Incorrect Options:
An increase in the Cash Reserve Ratio (CRR) in banks: The CRR is the fraction of net demand and time liabilities that commercial banks are required to hold as reserves with the Reserve Bank of India. An increase in CRR means banks must keep a larger portion of their deposits with the RBI, thereby reducing the funds available for lending. This directly decreases the credit creation capacity of banks and, consequently, lowers the money multiplier.
An increase in the Statutory Liquidity Ratio (SLR) in banks: The SLR is the proportion of net demand and time liabilities that commercial banks must maintain in liquid assets such as cash, gold, or approved government securities. An increase in SLR compels banks to hold more of their funds in these specified assets, reducing the amount available for direct lending to the public. This contraction in lending capacity diminishes the money multiplier.
An increase in the population of the country: Population growth alone does not directly influence the money multiplier. The money multiplier is primarily determined by the reserve requirements set by the central bank (CRR, SLR) and the public's preference for holding cash versus depositing it in banks (banking habit). While an increase in population might indirectly lead to more bank accounts and deposits over time, it is not a direct or guaranteed factor that increases the money multiplier in isolation. The banking habit, which reflects the public's financial behavior, is the relevant determinant here.
