Question

The multiple by which total deposits can increase for every dollar increase in reserves is the

Answer 1

The Money Multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply.

For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million. The money multiplier is 10.

The money multiplier is a key element of the fractional banking system.

There is an initial increase in bank deposits (monetary base)

The bank holds a fraction of this deposit in reserves and then lends out the rest.

This bank loan will, in turn, be re-deposited in banks allowing a further increase in bank lending and a further increase in the money supply.

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