Money Multiplier
Monetary multiplier
Monetary multiplier = 1/rrr where m=maximum amount of new checkable deposits that can be created by given the value of r. r= the percentage of checkable deposits that must be that must be available at all times by the bank. The reserve ratio equals the commercial bank?s required reserves divided by the commercials banks checkable deposits liabilities. If bank A had 500.00 in checkable-deposits and the reserve ratio was 10% then it would have to keep 50,000 in reserve.
The monetary multiplier relies on the reserve ratio to create new money. If bank A received $1000 in checkable deposits and the rrr=.2 then they would place $200 in reserves creating $800 dollars of excess money that they can then lend out. That $800 would then end up in bank B. bank B would place 20% of that in the reserve, leaving them with $640 in excess reserve. This would continue until there was no more money for the banks to hold, but in this process the initial $800 excess from bank A would create, a total of $4,000 in new money. Using this we can create an equation for finding the multiplier. The reciprocal of the reserve ratio or 1/R
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