What is a multiplier money?

The Multi -Plikator is a measurement of effect that the loan of funds from the Federal Government to the banking system. Each bank must maintain a certain amount of these borrowed reserve funds, but then it can lend the rest to other customers. These funds then end up in other banks until they are finally completely spent. So the monetary multiplier shows how the federal loan is actually worth many times the initial weight in the banking system. These funds are usually generated by the federal government by buying bonds from banks and their customers, which basically create new money for the economy. Although some of this money must remain in a reserve by law, the rest circulates throughout the economy and in fact becomes much more than its initial nominal value. How much these funds are worth depending on the monetary multiplier.

Perhaps a three -way way to calculate a monetary multiplier is to take a legally required reserve and divide it into one.For example, if the government demanded banks to leave 10 percent of borrowed reserve funds, then a multiplier would be divided by 0.10, which comes to 10. This means that a $ 10,000 loan (USD) will be multiplied from the federal government and actually should be $ 100,000 in the economy.

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In order to understand this process, it is important to understand that a bank that must maintain 10 percent in a reserve still has 90 percent of these federal funds available for lending to other customers. When the customer takes part of this money from the bank, it can put it in another bank. This second bank then has 90 percent of these funds available for lending to other customers. In other words, 10 percent that must be reserved is shared by all banks.

Another useful function of a cash multiplier is that it allows banks to calculate how much money can be lent to customers. ManyBank determines its own reserve, which is higher than the minimum federal law. Using this ratio, the bank can calculate its own multiplier. This amount is multiplied by the amount of excess reserves that the bank must come with the maximum amount that the bank can lend.