Question

What is credit multiplier?

Class XII
Money and Banking

Answer 1

credit multiplier Can be defined as the ratio of additional credit creation (Δ CC) to the total cash reserves (Δ R). That is credit multiplier (cm) can be measured as:

Credit multiplier (cm) = Δ CC/Δ R
                                                 
Total credit income creation (Δ CC) by the banks = 4 million, and total reserves = 1 million. Thus the credit multiplier can be obtained as

CM = Δ CC/Δ R = 4/1 = 4