A Deep Dive into the Money Multiplier Journey

In this insightful course on the Money Multiplier, we will explore one of the most important concepts in monetary economics that explains how banks help expand the money supply in an economy. We begin by discussing the meaning of the money multiplier and why it is sometimes also called the credit multiplier. You will learn the standard formula used to calculate it and understand the role of the reserve requirement ratio, which is decided by the central banking authority.

The course explains how the money multiplier typically ranges between 1 and 10, depending on economic and regulatory conditions.

The course will also cover how commercial banks contribute to the multiplier process by lending out their excess reserves, and the role that central banks play in shaping the monetary base. We will solve numerical problems to calculate total deposits created, initial deposits required, and impact of changes in reserve requirements.

Further, we will explore key assumptions behind the money multiplier model, such as full reserve lending and constant reserve ratios, and why these assumptions often don’t hold in real-world banking systems due to factors like excess reserves, public currency preferences, and market uncertainty.

By the end of the course, learners will have a deep understanding of how the banking system influences the money supply and the multiple factors that can enhance or limit this critical economic mechanism.