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.

Correct — A. The money multiplier is how many rupees of deposits the banking system builds on each rupee of reserves.

Statement 1 is right: cash people keep at home never returns to a bank as a deposit, so it leaks out of the lending chain.

Statement 3 is right: at a CRR of 20% the multiplier is 1 ÷ 0.20 = 5, and at 25% it falls to 1 ÷ 0.25 = 4.

Statement 2 reverses this, since reserves are money banks cannot lend → option (a).

Why the others are wrong

• (b)
  Only 2 and 3 — Statement 2 is the reversed one. A bigger share of deposits parked as reserves with the RBI leaves banks less to lend, so the multiplier falls, not rises.
• (c)
  Only 1 and 2 — This keeps the false statement 2 and drops the true statement 3. A higher CRR shrinks the multiplier: 1 ÷ 0.25 = 4 against 1 ÷ 0.20 = 5.
• (d)
  All 1,2 and 3 are three — Statement 2 cannot stand. Reserves are the part of deposits banks do not lend, so raising them lowers the multiplier.

When a bank lends, the loan is spent and usually comes back to some bank as a new deposit, which is lent again. Each round is smaller because part of it is held back.

Two things are held back: the reserves banks must keep under the CRR, and the cash the public holds outside banks. The more of either, the shorter the chain and the smaller the money multiplier.

Key facts

• With no cash held by the public, the money multiplier is 1 ÷ reserve ratio: at 20%, 1 ÷ 0.2 = 5, so ₹100 of reserves supports ₹500 of deposits.
• The Cash Reserve Ratio is the share of its deposits a bank must hold as cash reserves with the RBI.
• The RBI's tools for controlling money supply include open market operations, the bank rate and reserve requirements such as the CRR.

Common traps

• Reading 'higher reserves' as more money in the system. Reserves are what banks may not lend, so a higher reserve share shrinks the multiplier.
• Forgetting the public's cash. Money held at home is a leakage just as reserves are.

No directly related past PYQ was found.