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Money Multiplier

Definition

The money multiplier is the factor by which an initial deposit in a bank can increase the total money supply through the process of fractional reserve banking.

Analogy

Think of the money multiplier as a magic wand that turns a small deposit into a larger amount. Just like how one drop of water can create ripples that spread across a pond, an initial deposit can have a multiplying effect on the overall money supply.

Related terms

Reserve Ratio: The reserve ratio is the percentage of deposits that banks are required to hold as reserves. It determines the maximum potential money multiplier.

Deposit Creation: Deposit creation refers to the process by which banks create new money through lending based on their excess reserves and reserve requirements.

Money Supply: The money supply represents the total amount of currency and demand deposits (checking accounts) in circulation within an economy, influenced by factors such as the money multiplier.