The Money Multiplier Calculator quantifies the expansion of initial deposits within the banking system under fractional-reserve banking.

It illustrates the impact of reserve ratios on money supply, enabling users to assess how deposits drive economic activity.

Money Multiplier Calculator

Money Multiplier Calculator

Estimate the potential increase in money supply based on reserve ratios and deposited amounts.

? Enter the starting deposit amount for calculating the potential money supply.
? Enter the percentage of reserves banks must hold. A higher ratio limits the money multiplier effect.

Using the Money Multiplier Calculator

This tool calculates the potential money supply increase from an initial deposit and the central bank’s reserve requirement ratio.
Input the initial deposit amount and the reserve ratio as a percentage. The calculator outputs the money multiplier and resulting money supply, demonstrating the deposit’s amplification across the banking system.

Definition: Money Multiplier

The Money Multiplier measures the potential growth in money supply from an initial deposit in a fractional-reserve system. Banks retain a fraction of deposits as reserves and lend the remainder, which, when redeposited, generates additional money.
The multiplier’s magnitude hinges on the reserve requirement ratio; a lower ratio amplifies the effect, while a higher ratio constrains it.

Formula and Examples

The money multiplier is calculated as:
\( \text{Money Multiplier} = \frac{1}{\text{Reserve Requirement Ratio}} \)

For a 10% reserve ratio:

\( \text{Money Multiplier} = \frac{1}{0.10} = 10 \)

This indicates that each dollar deposited can expand the money supply by up to $10. With a $5,000 initial deposit:

\( \text{Potential Money Supply} = 10 \times 5,000 = 50,000 \)

This estimates the total money creation potential given the reserve constraint.


Money Supply and Reserves

Money Supply denotes the total currency and deposits circulating in an economy, influenced by the reserve requirement ratio.

Reserves are the mandatory portion of deposits banks must hold, as dictated by the central bank, to regulate money circulation.

A lower ratio increases lending capacity, enhancing money supply growth, while a higher ratio restricts lending, moderating expansion.

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