What is Money Multiplier? How Money Multiplier impacts the money supply?

In this post, you will be aware of the highlighting features of money multiplier:

·      Chart underneath displays how banks generate more money through additional reserves.

·      In other words, its procedure of generating more money by banks from reserve money.

·      Money multiplier is the method through which banks make more money through its additional reserves, thus intensifying money supply.

·      RBI produces money in banks by reserve money (M0). As instructed by RBI, banks retain aside some money as part of reserve requirement (CRR1) and lends out the additional reserves (excess money in form of deposits in banks).

Money Multiplier Impacts Money Supply

The following points reveal how money multiplier impacts the money supply:

·      Variations in money multiplier will have influence on the money supply.

·      Reserve ratio, currency to deposit ratio, credit-deposit ratio are the factors determining money multiplier.

·      Low reserve ratio, would need banks to retain aside less investments as cash reserve ratio, thus increasing its extra reserves to give out which upturns money supply. Higher reserve ratio will have reverse effect on money supply.

·      Money supply is a function of money multiplier and reserve money.

·      Currency to deposit ratio (currency leakage) tells how much public is holding as cash and not re depositing in banks. Further cash held by public means lesser payments thus dropping the amount bank can lend out causing in lower money supply. Reverse holds true when less cash is held by public.

·      Credit-deposit ratio designates how much banks are lending out instead of keeping with themselves. High credit-deposit ratio means banks are lending out more money which in turn would increase money supply.

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