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Money Multiplier

The creation process of money in a fractional-reserve banking system.

Glossary:

  • reserve ratio
    The fraction of money reserve required to back up a bank loan expressed as a percentage. Aka RR.
  • RR
    Reserve ratio. The fraction of money reserve required to back up a bank loan expressed as a percentage.
  • multiplier
    1/leakage rate. For example, the expenditure multiplier = 1/MPS where MPS is the marginal propensity to save. The money multiplier = 1/ RR where RR is the reserve ratio.

Topics:

Money and Credit

Keywords

fractional reserve system, money multiplier, reserve ratio