Money Multiplier

How Money Multiplier impacts Money Supply
Money supply 2 is a function of money multiplier and reserve money.
Changes in money multiplier will have impact on the money supply.
Factors determining money multiplier are reserve ratio, currency to deposit ratio, creditdeposit
ratio.
Low reserve ratio, would require banks to keep aside less reserves as CRR, thereby
increasing its excess reserves to lend out which increases money supply. Higher reserve
ratio will have reverse effect on money supply.
Currency to deposit ratio (currency leakage) tells how much public is holding as cash
and not re depositing in banks. More cash held by public means lesser deposits thereby
reducing the amount bank can lend out resulting in lower money supply. Reverse holds
true when less cash is held by public.
Credit-deposit ratio indicates how much banks are lending out rather than keeping with
themselves. High ratio means banks are lending out more money which in turn would
increase money supply.
Chart below gives a snap shot of the money supply.
2
Money supply refers to broad money(M3) which is currency with public + Deposits with bank (time+
demand deposits )