Detailed Explanation:

Answer: Option 2 — Increase in the banking habits of the population

The money multiplier increases when people deposit more money in banks rather than holding cash. This increases the deposit base available for banks to lend, thereby multiplying the money supply through the credit creation process. Higher banking habits mean lower currency-deposit ratio, which directly increases the money multiplier.

❌ Option 1 – Incorrect: Increase in Cash Reserve Ratio (CRR) reduces the money multiplier as banks must hold more reserves and can lend less.
✅ Option 2 – Correct: Increase in banking habits reduces cash holdings and increases deposits, thereby increasing the money multiplier.
❌ Option 3 – Incorrect: Increase in Statutory Liquidity Ratio (SLR) reduces the money multiplier as banks must hold more liquid assets and have less funds for lending.
❌ Option 4 – Incorrect: Population increase does not directly affect the money multiplier mechanism, which depends on reserve ratios and banking habits.

📝 Short Notes: Money Multiplier

• Money Multiplier Formula: m = 1/r, where r is the reserve ratio (CRR). Alternatively, m = (1 + cdr)/(cdr + rr), where cdr is currency-deposit ratio and rr is reserve ratio.
• Direct Relationship: Money multiplier increases with increase in banking habits (lower currency-deposit ratio) and decreases with increase in reserve requirements.
• Cash Reserve Ratio (CRR): Percentage of deposits banks must maintain with RBI as reserves. Higher CRR → Lower money multiplier.
• Statutory Liquidity Ratio (SLR): Percentage of deposits banks must maintain in liquid assets (gold, government securities). Higher SLR → Lower money multiplier.
• Currency-Deposit Ratio: Ratio of cash held by public to deposits in banks. Lower ratio (higher banking habits) → Higher money multiplier.
• Credit Creation: Banks create money through lending. If initial deposit is ₹100 and CRR is 10%, banks can lend ₹90, which when re-deposited creates ₹81 for further lending, and so on.