ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In fractional reserve banking, the money multiplier (or deposit multiplier) effect shows how banks can re-lend a portion of the deposits on-hand to increase the amount of money in the economy. In this way, commercial banks have a large degree of influence on economic outcomes.

Detailed explanation-2: -What Is the Deposit Multiplier? The deposit multiplier is the maximum amount of money that a bank can create for each unit of money it holds in reserves. The deposit multiplier involves the percentage of the amount on deposit at the bank that can be loaned.

Detailed explanation-3: -The deposit multiplier is calculated as one divided by the reserve ratio. The money multiplier is the increase in the bank’s money supply. It measures the change in money supply created through bank lending and is usually lower than the deposit multiplier since banks don’t lend all of their reserves.

Detailed explanation-4: -In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking system.

Detailed explanation-5: -Banks create money by making loans. A bank loans or invests its excess reserves to earn more interest. A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar. The increase in the money supply is the money multiplier.