Money Multiplier Calculator
Calculate the banking money multiplier from reserve requirements.
See how much money banks create from a monetary base through lending and credit expansion.
How Banks Create Money
When a bank receives a deposit, it keeps a fraction in reserve and lends the rest. The borrower deposits that loan in another bank, which also lends most of it out. This chain of lending creates far more money than the original deposit.
Simple Money Multiplier: M = 1 / RR
Money Supply: MS = Monetary Base × M
Where:
- M = money multiplier
- RR = reserve requirement ratio (as a decimal)
- MS = theoretical maximum money supply
- Monetary Base = currency in circulation + bank reserves (central bank money)
Example: Reserve requirement = 10% (0.10) Multiplier = 1 / 0.10 = 10 If monetary base = $1,000 → maximum money supply = $10,000
Expanded money multiplier (with excess reserves and currency drain): M = 1 / (RR + ER + C)
Where:
- ER = excess reserve ratio (banks voluntarily hold above the requirement)
- C = currency-to-deposit ratio (money people hold as cash, not deposited)
Important limitations: This model is theoretical. In reality, banks may not lend out every available dollar. During financial crises, excess reserves rise sharply, reducing the effective multiplier. The US Federal Reserve eliminated reserve requirements in March 2020.
Monetary policy connection: Central banks raise reserve requirements to reduce the money supply and fight inflation. Lowering reserve requirements allows more credit creation and stimulates economic activity. Open market operations (buying/selling government bonds) adjust the monetary base directly, which then gets multiplied through the banking system.