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1 September, 05:42

The money multiplier is greater than one because banks: hold the entire amount of deposits as reserves. hold only a fraction of deposits as reserves. do not lend any of deposits out as loans. borrow loans from the Federal Reserve.

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  1. 1 September, 07:53
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    hold only a fraction of deposits as reserves.

    Explanation:

    Money multiplier denotes the central bank's ability to create final deposits many times the initial deposits.

    They do so because of their partial (fractional) reserve requirement, mandated by central bank, called as Legal Reserve Ratio = LRR

    Money Multiplier = Final Deposits / Initial Deposits = 1 / Reserve Requirement

    Eg : Initial Deposits = 100, LRR = 10%

    On getting 100 initial deposits, banks retain 10% ie 10 as reserve, lend out remaining 90. These 90 spent by borrower come back in the bank account of receiver. Out of 90, banks again retain 10% i. e 9 as reserves, lend 81. Same process continues until:

    Final Deposits = (1 / LRR) x Initial Deposits

    Final deposits = (1 / 0.1) i. e 10 times initial deposits

    = 10,000
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