With reference to ‘Money Multiplier’, consider the following statements:
1. A higher Money Multiplier indicates that the central bank is generating a greater money supply from the money provided by the banking system.
2. Money Multiplier in the upward trajectory reflects enhanced liquidity generation in the economy.
Select the answers using the codes given below:
(a).1 only
(b). 2 only
(c). Both 1 and 2
(d). Neither 1 nor 2
Explanation
A country’s Money Multiplier is influenced by two main factors: - the amount of cash individuals (and businesses) hold and the reserves that banks maintain Statement 1 is not correct : A higher Money Multiplier indicates that the banking system is generating a greater money supply from the money provided by the central bank. In India, recent efforts to promote financial inclusion have encouraged people to hold less cash in hand relative to their deposits, which partly explains the increase in the Money Multiplier.
Statement 2 is correct :Money Multiplier has been on an upward trend over the years. It declined during the COVID-19 pandemic as increased economic uncertainty caused individuals to increase their cash holdings, resulting in a fall. However, after FY22, it has resumed its upward trajectory, reflecting enhanced liquidity generation in the economy.
When the Money Multiplier is on an upward trajectory, it means that the banking system is able to lend out a larger proportion of its reserves, leading to a higher creation of money. This increase in lending and money creation enhances the liquidity in the economy. Essentially, as more money is generated from the existing reserves, it increases the availability of funds for consumption, investment, and economic activities, reflecting enhanced liquidity generation in the economy. This process is a key indicator of a more fluid and active economic environment.
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