\[m=\frac{1}{r}\]
Variables
mmoney multiplier
rreserve requirement ratio
Description
What is this formula?
The money multiplier estimates how much the money supply can expand from an initial increase in bank reserves.
When to use it
Use it in macroeconomics and monetary policy to estimate the potential expansion of deposits under a fractional reserve banking system.
Example
Reserve requirement ratio r = 0.10
Formula:
m = 1 / r
Substitution:
m = 1 / 0.10
Result:
m = 10
A reserve requirement of 10% implies a theoretical money multiplier of 10.
Applications
- Monetary policy analysis
- Banking system education
- Money supply estimation
- Central bank reserve studies
Note
This is a simplified theoretical model. In real economies, the actual money multiplier may be lower because banks may hold excess reserves, borrowers may not demand loans, and the public may hold part of the money supply as currency.