What is MONEY MULTIPLIER?

A monetary base and an economy’s money supply as a mathematical relationship. It explains increased cash amounts in circulation caused by the banks’ use of their depositors’ funds to lend money. A bank loan generates money – the loan becomes a new deposit as cash the borrower can withdraw. This money-generating power comes from the fractional reserve system. It requires banks to keep in hand only a portion of the depositors’ funds, 10 to 15 percent, typically 12 percent. The initial deposit is now a multiple because it is booked in the depositor account as well as booked as a loan it the borrower’s account. Available cash has been increased.

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