Money Multiplier
What is Money Multiplier?
The textbook link between bank reserves and the total money supply.
Understanding Money Multiplier
When banks lend out part of their deposits, the loans become new deposits elsewhere, expanding the money supply. With a reserve ratio r, the textbook multiplier is 1/r.
In practice the relationship is loose: banks lend when they find good borrowers and then obtain reserves, and U.S. reserve requirements have been zero since March 2020.