Answer to Question #80750 in Macroeconomics for Georgia Brown

Question

explain in detail how money multipliers work

Answer 1

The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money. That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is a multiple of reserves; this multiple is the reciprocal of the reserve ratio.