Question

What is a "currency drain"? How and why does it affect the money multiplier

Answer 1

Money multiplier has an important variable which is the currency deposit ratio. This defines the ratio of the currency held outside the banking system to the checkable deposits. Currency drain is the increase in the currency in circulation which also indicates the increase in liquidity in the market.

currency drain generally decreases the amount of money that the banks are able to create by reducing their deposits. Reduction in this amount indicates that there will be a lower value of money multiplier. This is true because when banks have fewer deposits, their excess reserves are reduced and therefore less money is created. In short, currency drain decreases the value of money multiplier.