Question

What is money drain and how does it reduce the size of deposit multiplier? Please explain.

Answer 1

Money drain is the amount of cash or currency citizens of a country hold with them.

Money drain reduces the deposit multiplier because cashes with the people are not with the bank and thus, they are not part of the fractional reserve banking, which is the reason of the multiplication of the money in the economy. In case of a fractional reserve banking, banks keep a fraction of the deposit which increases the total money supply. Despite being part of M1, currency held by public do not lead to any increase in the total money supply, it reduces the size of the deposit multiplier.