Money Multiplier
1 Quick Explanation 1–3 min
The money multiplier tells us how many times the initial deposit expands into total deposits.
Higher LRR → lower multiplier. It is the inverse of the legal reserve ratio.
2 Detailed Notes
Definition
Definition
Money multiplier (m) is the ratio of total money supply (deposits) to the initial (primary) deposit or reserve money. m = 1/LRR, assuming no cash leakages.
Formula
Formula
m = 1 ÷ LRR
Total deposits = Initial deposit × mIf LRR = 20%, m = 5. An initial deposit of ₹10,000 creates total deposits of ₹50,000.
Comparison
Relationship with LRR
| LRR | Money multiplier (1/LRR) | Deposits from ₹1,000 |
|---|---|---|
| 10% | 10 | ₹10,000 |
| 20% | 5 | ₹5,000 |
| 25% | 4 | ₹4,000 |
| 50% | 2 | ₹2,000 |
Important
What if there are cash leakages?
If the public holds some cash and deposits less, the actual multiplier is lower than 1/LRR. Real-world multiplier ≈ 1/(LRR + cash-drain ratio).
Example
Role of RBI
In inflation, RBI raises CRR → LRR rises → multiplier falls → less money created → demand cools. That's monetary policy using the multiplier.
In One Minute
Money multiplier = 1/LRR. Total deposits = initial deposit × multiplier. Higher LRR → smaller multiplier → less credit.
Important for Exam
- ⭐ 1-mark: formula of money multiplier.
- ⭐ 3-mark: numerical — given LRR and primary deposits, find total deposits & money created.
- ⭐ Effect of rise in CRR on money supply.
- ⭐ Assumption of no cash leakages.
Watch & Learn
Watch on YouTubeMoney multiplier - Money and banking - macroeconomics
by Rajat Arora
Why watch? Direct board numerical approach.
Open on YouTube Watch on YouTubeMoney multiplier - Money and banking - macroeconomics
by Rajat Arora
Why watch? Concept built from credit creation table.
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