The Money Multiplier Calculator provides a clear view of how initial deposits can expand within the banking system.
By understanding the relationship between reserve ratios and money supply, users can gain insight into the powerful effect of fractional-reserve banking. Use this tool to see how small deposits can contribute to significant economic growth.
Money Multiplier Calculator
Estimate the potential increase in money supply based on reserve ratios and deposited amounts.
How to use the Money Multiplier Calculator
The Money Multiplier Calculator is a simple tool to estimate the potential increase in money supply based on an initial deposit and the reserve requirement ratio set by central banks.
Start by entering your initial deposit amount and the reserve ratio in percentage terms. The calculator will then use these inputs to display the money multiplier and the resulting money supply, helping you understand how much the original deposit can expand throughout the banking system.
Definition: Money Multiplier
The Money Multiplier is a concept that illustrates the potential increase in total money supply when a new deposit enters the banking system. It represents the amplification effect of an initial deposit as banks hold only a fraction of deposits as reserves and lend out the rest.
By re-depositing these loans, the system creates additional money, multiplying the initial deposit across the economy. The money multiplier depends heavily on the reserve requirement ratio, as a lower reserve ratio leads to a higher multiplier effect.
Formula and Examples
The formula to calculate the money multiplier is:
\( \text{Money Multiplier} = \frac{1}{\text{Reserve Requirement Ratio}} \)For instance, if the reserve requirement ratio is 10%, the formula would be:
\( \text{Money Multiplier} = \frac{1}{0.10} = 10 \)This result means that for every dollar deposited, up to $10 can be added to the money supply. If the initial deposit is $5,000, then the potential increase in the money supply would be:
\( \text{Potential Money Supply} = 10 \times 5,000 = 50,000 \)This calculation gives an estimate of how much new money can be created from the original deposit, given the reserve ratio constraints.
Money Supply and Reserves
Money Supply refers to the total amount of money available within an economy at any given time, including cash, coins, and deposits in banks. The money supply expands or contracts based on the reserve requirement ratio set by central banks.
Reserves are the portions of deposits that banks must retain and cannot lend out, as mandated by the central bank. These reserves help control the amount of money circulating in the economy. A lower reserve ratio means banks hold less of each deposit, which increases the potential for money supply expansion. Conversely, a higher reserve ratio limits lending, reducing the multiplier effect and slowing down money supply growth.
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