Multiplier Effect

Definition - What does Multiplier Effect mean?

Multiplier effect is the ability of the money supply to grow simply through the normal course of banking. When banks and other financial institutions accept deposits and subsequently loan out those deposits to earn interest, the amount of money in the system grows.

Testopedia explains Multiplier Effect

When customer makes a deposit in a bank account the bank is only required to maintain a small percentage of that deposit as part of its reserve requirement. The bank is then allowed to loan out the rest. If for example the bank was required to keep 10% of its deposits on reserve it could loan out $90 of ever $100 it has on deposit. If the bank made just one loan that transaction would cause the $100 to grow into $190 system wide. When the person who borrowed the money uses it to purchase something.

Connect with us

Testopedia on Linkedin
Testopedia on Linkedin
Tweat www.testopedia.com
"Testopedia" on Twitter


'@Testopedia'
Sign up for Testopedia's Free Newsletter!