Question

what is the money multiplier and how it works.

explain and discuss the money multiplier?

Answer 1

The money multiplier is nothing but an indication of how initial deposit can create a higher amount of money in the supply of money.

The example to describe the money multiplier is as follows.

If the bank invests 2 million USD and this outputs 20 million USD in final supply of money.

Here the money multiplier is 10

The money multiplier is equal to change in money supply divided by the change in reserves

The money multiplier works as follows

• Someone deposit money in a commercial bank.
• The bank has the right to keep only some reserves.
• They give the rest in form of loans and gain interest and creation of new money.
• This money supply ends up this with a greater amount of money for the initial deposit.