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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.

1. Only 1 and 3
2. Only 2 and 3
3. Only 1 and 2
4. All 1, 2 and 3

Correct answer: Only 1 and 3

Solution

Cash held by people outside banks is a leakage, so it reduces the money multiplier. A higher CRR forces banks to keep more deposits as reserves, reducing their ability to lend and create money. Therefore, statements 1 and 3 are correct, while 2 is incorrect.

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