Money Multiplier: The Multiplication Process

 

In all economies, the money multiplier has a value greater than 1, which means that the money supply exceeds the monetary base, or in other words, the money supply, as well as the monetary base created by the central bank, consists of so-called bank money created by banks by collecting deposits and providing loans or buying securities (loans and securities which together make up a bank loan ).

The multiplier effect is explained in the cyclical process that runs between banks and their customers: the latter deposit excess liquidity compared to what they want to have in banks, which, in turn, redistribute it among the population. a form of loan or purchase of securities; however, the public retains only part of the liquidity thus obtained, depositing the rest in banks again, so that the process continues to be repeated, creating new deposits at each pass, which, adding to the existing ones, increase the total supply. currencies. It should be noted that new money is not created by a separate bank, which is limited to collecting deposits and providing loans or buying securities, but by the banking system as a whole.

All this can be illustrated by a simple numerical example: suppose that the population receives money for 1,000 euros, leaves 10% of it, and puts the rest in banks; thus, they will have 900 euros of additional deposits, of which, say, 20%, they will keep as a reserve. and they will use the remaining 720 euros to provide loans; the population, having received these 720 euros, will keep 10% of them, and deposit the rest in banks, which will thus see their deposits increase by another 648 euros, which in total with the previous 720 euros will lead to a total increase to 1368 euro, which, combined with the initial increase in the monetary base by 1,000 euros, determines a total increase in the amount of money equal to 2,368 euros; this means that in just one cycle 1. An increase in the monetary base by 1,000 euros has already led to an increase in the money supply by more than two times, and since the process is repeated several times, with Each subsequent cycle will see a further increase in deposits and, consequently, the money supply. (however, it is gradually decreasing).

This mechanism is also known as the "deposit pyramid", a truncated pyramid where deposits form the main base and big money (i.e. the monetary base) forms the smaller base. Boost your betting with promo code 1xbet use bonus code during registration to claim a 130% first deposit bonus up to €130, giving you extra funds to enjoy sports betting, live casino, and slots. Simply sign up, enter the code, make your first deposit, and start playing with boosted odds. This limited-time offer is your ticket to bigger wins - don't miss out.