Deposit Multiplier
Candlefocus EditorThe deposit multiplier is the maximum amount of money a bank can create in the form of checkable deposits for each unit of money of reserves. Banks calculate the deposit multiplier by dividing the total amount of deposits created in a certain period of time by the amount of total reserves held during the same period. This figure is key to maintaining an economy's basic money supply. It's a component of the fractional reserve banking system, which allows banks to lend out more money than they actually have on hand.
For example, let's say that a bank has reserves of $100. Using the deposit multiplier, the bank can lend out an amount that is greater than $100. The exact amount lent out depends on the bank's specific deposit multiplier, which in turn depends on the reserve requirements set by the Federal Reserve. The higher the reserve requirements, the lower the deposit multiplier, and thus, the bank can lend out less money.
It's important to note that the deposit multiplier is different from the money multiplier. The money multiplier reflects the change in a nation's money supply created by the actual use of a loan, while the deposit multiplier is a measure of how much money a bank can create through fractional reserve banking.
In a nutshell, the deposit multiplier is an important economic tool used by banks to make money. By understanding how this works, banks can carefully control the amount of money they lend out and help to maintain a stable money supply.