Question

What is money multiplier? How will you determine its value? What ratios play an important role in the determination of the value of the money multiplier?

Answer 1

The money multiplier is the amount of money that banks create as deposits with each unit of money it is keeping as a reserve. It is determined as the ratio of the total money supply by the stock of high powered money in the economy.

$M_m=M/H$

Where,

$M_m$ is the money multiplier

M represents the stock of money

H represents high powered money

Since,

$M/H=\raisebox{1ex}{$(1+cdr)$}\!\left/ \!\raisebox{-1ex}{$(cdr+rdr)$}\right.>1.$

Hence, the current deposit ratio (cdr) and reserve deposit ratio (rdr) play an important role in the determination of money multiplier.