The money multiplier

Question

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The money multiplier is an expression that converts the monetary base (currency in circulation plus reserves held by banks at the Fed) into the money supply. It represents the amount by which the money supply increases in response to a given increase in the monetary base. The formula for the money multiplier is (1 / required reserve ratio). The required reserve ratio is set by the Fed, but the money multiplier itself is not completely controlled by the Fed as it also depends on the behavior of banks and the public. The money multiplier is typically larger than the simple deposit multiplier, which only takes into account the initial increase in reserves from new deposits.

The Money Multiplier