The factor by which the total money supply expands for each unit of base money (high-powered money) created by the central bank, arising because banks lend out most of their deposits, which then return to the banking system as fresh deposits.
- Base money (also called high-powered money or reserve money, M0) is currency plus banks' reserves with the RBI; the broad money supply (M3) is a multiple of it.
- The money multiplier equals the broad money supply divided by base money; in simple terms it is the inverse of the reserve ratio.
- A higher Cash Reserve Ratio (CRR) leaves banks less to lend, so it lowers the multiplier and the money supply; see concept crr and slr and concept cash reserve and money multiplier.
- The process: a deposit lets a bank lend a share, that loan is re-deposited, the next bank lends a share again, and so the money supply multiplies.
- It explains how the RBI can control the money supply by changing the reserve requirement or base money; see concept money supply and aggregates.
The concept (money supply as a multiple of base money, inversely related to the reserve ratio) is a standard money-and-banking fact.
The money multiplier links base money (M0) to broad money (M3); a higher CRR lowers the multiplier; it is the inverse of the reserve ratio, not a fixed number.
Broad money divided by base money; the inverse of the reserve ratio; a higher CRR lowers it and shrinks the money supply.