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What is the formula for the money supply multiplier and how does it work? That is,...

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kjjkjkhkkj | Student, Undergraduate | eNotes Newbie

Posted May 3, 2010 at 2:16 PM via web

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What is the formula for the money supply multiplier and how does it work? That is, explain the process if you need to.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 3, 2010 at 2:23 PM (Answer #1)

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The money supply multiplier is simply the multiplier that tells us how much the money supply will go up when a given amount of money is deposited in a bank.

When the money is deposited in a bank, some fraction of the money is then lent out.  The borrower deposits the money in their own bank, which lends a fraction of it out in turn.  This keeps happening over and over again.

The formula for this is simply 1/reserve requirement.

So, if the reserve requirement is .1 (10%), the money multiplier is 10.  If this is the case, $1000 deposited in a bank will increase the money supply by $10,000.

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krishna-agrawala | College Teacher | Valedictorian

Posted May 3, 2010 at 3:29 PM (Answer #2)

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The term multiplier in economic refers to change in an induced variable such as GDP per unit change in an external variable such as government spending.

Money supply multiplier is defined as the ratio of increase in money supply to the increase in bank reserves. Generally the the money supply multiplier is equal to the inverse of required reserve ratio. Thus for a required reserve ratio of 0.1 the money supply multiplier will be 10. Expressed as a formula Money supply multiplier can be represented as follows.

Money Supply Multiplier = (Change of money supply)/(Change of reserves)

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