The correct option is 2 only
Explanation
The Money Multiplier is a fundamental concept in macroeconomics that describes the maximum amount of money the banking system generates with each unit of excess reserves. It establishes the relationship between the monetary base (high-powered money) and the total money supply in the economy.
Statement-wise Analysis:
- Statement 1 is Incorrect: The Money Multiplier is defined as the ratio of the stock of money ($M$) to the stock of high-powered money ($H$). High-powered money (also known as the monetary base or reserve money) consists of currency held by the public and reserves held by banks. The formula is expressed as $m = \frac{M}{H}$.
- Statement 2 is Correct: The value of the money multiplier is not determined solely by the currency in circulation. It is determined by the Currency-Deposit Ratio (the proportion of money the public holds as cash versus deposits) and the Reserve-Deposit Ratio (the proportion of deposits banks hold as reserves).
- Statement 3 is Incorrect: In a simplified economy, the money multiplier is inversely proportional to the reserve ratio (Cash Reserve Ratio or Statutory Liquidity Ratio). If the reserve ratio increases, banks must hold more funds in reserve and can lend less, which reduces the money creation process. Mathematically, in a simplified model, Multiplier = $\frac{1}{\text{Reserve Ratio}}$.
Key Takeaway:
The Money Multiplier indicates the extent to which the money supply exceeds the monetary base. It is inversely related to the reserve ratio and the currency-deposit ratio; higher reserve requirements or higher cash holdings by the public reduce the multiplier effect.