Money Multiplier Calculator

What is the Money Multiplier?

The money multiplier shows how an initial deposit can lead to a larger increase in the total money supply. It's based on the concept of fractional reserve banking, where banks are required to hold only a fraction of deposits as reserves and can lend out the rest.

How to Use This Calculator

1. Enter the initial deposit amount (the amount of money initially deposited)
2. Enter the required reserve ratio (the percentage of deposits that banks must hold in reserve)
3. Click "Calculate" to see the results

Understanding the Formula

The money multiplier is calculated as: 1 / Reserve Ratio

For example, if the reserve ratio is 10% (0.10), the money multiplier would be 1/0.10 = 10. This means an initial deposit of $1,000 could potentially increase the money supply by $10,000.

Practical Applications

This calculator helps you understand:

• How monetary policy affects the banking system
• The relationship between reserve requirements and money supply
• The maximum potential impact of initial deposits

Limitations to Remember

Keep in mind that this is a theoretical calculation. In practice, the actual money multiplier can be lower due to:

• Excess reserves held by banks
• Increased demand for cash
• Banks becoming more conservative in lending