Money Multiplier Calculator
Calculate the money multiplier effect and analyze banking system money creation
Calculate Money Multiplier
Bank accounts from which funds can be withdrawn on demand
Percentage of deposits banks must hold as reserves
Physical currency (coins and paper money) in circulation
Money Multiplier Results
Key Components
Theoretical Maximum
Calculation Formulas
Bank Reserves: 10% × $0 = $0
Monetary Base: $0 + $0 = $0
Money Supply: $0 + $0 = $0
Money Multiplier: $0 ÷ $0 = 0.00
Analysis
Example Calculation
Banking System Example
Scenario: US Banking System
Checkable Deposits: $1,000,000 (1 million)
Reserve Ratio: 10% (Federal Reserve requirement)
Currency in Circulation: $500,000
Step-by-Step Calculation
1. Bank Reserves = 10% × $1,000,000 = $100,000
2. Monetary Base = $500,000 + $100,000 = $600,000
3. Money Supply = $500,000 + $1,000,000 = $1,500,000
4. Money Multiplier = $1,500,000 ÷ $600,000 = 2.5
Simple Multiplier = 1 ÷ 0.10 = 10
Key Insight
The actual money multiplier (2.5) is lower than the simple multiplier (10) because people hold cash rather than depositing everything in banks, reducing the multiplier effect.
Key Banking Components
Reserve Ratio
Percentage of deposits banks must hold
Monetary Base
Currency + Bank Reserves
Money Supply
Currency + Checkable Deposits
Multiplier Types
Simple Money Multiplier
1 / Reserve Ratio (theoretical maximum)
Actual Money Multiplier
Money Supply / Monetary Base (real world)
Note: The actual multiplier is typically lower than the simple multiplier due to cash holdings and other factors
Understanding the Money Multiplier
What is the Money Multiplier?
The money multiplier is a crucial concept in monetary economics that shows how changes in the central bank's monetary base can lead to larger changes in the overall money supply. It demonstrates the banking system's ability to create money through fractional reserve banking.
How Banks Create Money
- •Banks receive deposits from customers
- •They keep a fraction as reserves (reserve ratio)
- •The remainder is lent out to borrowers
- •Borrowed money is re-deposited, continuing the cycle
Money Multiplier Formulas
Money Multiplier = Money Supply / Monetary Base
Simple Multiplier = 1 / Reserve Ratio
Monetary Base = Currency + Bank Reserves
Key Variables
- Reserve Ratio: Percentage of deposits held as reserves
- Checkable Deposits: Bank accounts available on demand
- Currency in Circulation: Physical money in the economy
- Bank Reserves: Funds banks must keep on hand
Important: The Federal Reserve uses the money multiplier to understand how monetary policy changes affect the broader economy.
Factors Affecting the Money Multiplier
Reserve Requirements
Higher reserve ratios reduce the multiplier effect by requiring banks to hold more reserves
Cash Holdings
When people hold more cash, less money is deposited, reducing the multiplier
Bank Behavior
Banks may hold excess reserves, limiting their lending and the multiplier effect