Given the reserve-holding ratio e and the fraction of deposits held as cash c, the money multiplier becomes

Question

Quizplus · Accepted Answer

The formula for the money multiplier is (1 + c)/(e + c). This is derived from the formula for the maximum amount of money that can be created by a single deposit, which is 1/(e + c). The money multiplier is the inverse of this, so we can flip the fraction to get the formula (e + c)/1, then multiply by c/c to get (ec + c^2)/c. Simplifying further, we get (1 + c)/(e + c).

Given the Reserve-Holding Ratio E and the Fraction of Deposits