Identify the correct money multiplier formula.

The correct answer is Option (2) → 1/CRR

Banks must keep a fixed share of their deposits as cash, the cash reserve ratio (CRR), and can lend the rest; every loan returns to the banks as a new deposit. Lending stops when the reserves are just the CRR share of all deposits, so deposits can grow to 1 ÷ CRR times the reserves. This ratio of money supply to reserves (high powered money) is the money multiplier.

With a CRR of 20 per cent, the multiplier is 1 ÷ 0.2 = 5, so reserves of Rs 100 can support deposits of Rs 500.

Why the other options are incorrect

• Option (1) 1/1-c — Incorrect. This is the investment multiplier of income determination, where c is the marginal propensity to consume. It measures the rise in income, not in money supply.

• Option (3) 1/SLR — Incorrect. The statutory liquidity ratio is the share of deposits banks must keep in liquid assets. The money multiplier is worked out from the cash reserve ratio, not from the SLR.

• Option (4) 1/c — Incorrect. This is not a multiplier formula.