Question

What are the determinants of money multiplier?

Answer 1

There are three determinants of money multiplier, which is defined as the multiple by which the broader money supply grows in relation to the currency in circulation. Money supply grows as a multiple of currency due to the ability of banks to "create" money by advancing much more as loans as compared to the deposits they hold. Since the banks are required to keep a fraction of deposits as reserves they can advance a multiple (usually 1/required reserve ratio) of deposits as loans.

In practice, the money multiplier also get affected by the currency which is not in circulation (held by the public) and the excess reserves the banks hold (reserves over and above the amount indicated by the required reserve ratio).

Hence, the three determinants of money multiplier are:

Currency held by public (i.e., not in banking system)

Required reserve ratio

Excess reserves held by banks.