Money Multiplier Definition: The increase in total deposits that would occur in the whole banking system as a result of a new deposits in a single bank. Formula: ^ deposits/^ reserves = 1/target reserve ratio
Reference: John E. Sayre, Alan J. Morris. Principals of Economics 6th edition. McGraw-Hill Ryerson, 2009. Page 494
e.g if there is Target reserve of 40000 and demand deposit of 100000. TRR= 40000/100000* 100 = 40% or 0.40
money multiplier= 1/.4= 2.5. in this example the increase demand deposit by one dollar the money supply will increase by $2.50, so for 100, it will be 100*2.5 = 250 money supply
Factors that effect the money multiplier(to mke it go up)
Decrease in target reserves
decrease in the amount of cash people hold
increase in the demand for loans
increase in the number of credit worthy loan applicants(reduce requirement for credit worthiness)
To make it go down is the opposite.
Dr. Stephanie Powers, "Monetary Policy", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)
Definition: The increase in total deposits that would occur in the whole banking system as a result of a new deposits in a single bank.
Formula: ^ deposits/^ reserves = 1/target reserve ratio
Reference:
John E. Sayre, Alan J. Morris. Principals of Economics 6th edition. McGraw-Hill Ryerson, 2009. Page 494
e.g if there is Target reserve of 40000 and demand deposit of 100000. TRR= 40000/100000* 100 = 40% or 0.40
money multiplier= 1/.4= 2.5. in this example the increase demand deposit by one dollar the money supply will increase by $2.50, so for 100, it will be 100*2.5 = 250 money supply
Factors that effect the money multiplier(to mke it go up)
To make it go down is the opposite.
Dr. Stephanie Powers, "Monetary Policy", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)