Page 152 - DECO402_Macro Economics

Unit-17: Money Multiplier and Credit Creation by Commercial Banks

then money multiplier will be 3. Coefficient of Money multiplier may be known from the below Notes
mentioned formula:

Money Supply
Money Multiplier =
High Powered Money
OR
M
m = ....(i)
H
(Here, m = Money Multiplier, M = Supply of Money (currency in circulation and bank’s demand
deposits), H = High power money)
Total Supply of money is the sum of currency and demand deposits.
M = C + D …(ii)
(Here C = Currency, D= Demand Deposits)

 Difference between M and H
M = Supply of money in which currency and demand deposits are included.
H = High Powered money which includes currency and reserves of commercial banks.

In cash reserve only includes required minimum reserves of the commercial banks and excess
reserves.

Notes Money multiplier is the ratio of change in supply of money and change in monetary
base.

Total supply of high powered money is equal to the sum of currency, required reserves of the banks,
other deposits of the banks and excess reserve with the central bank.
H = C + RR + ER ...(iii)
(Here H: High powered money, C: Currency, RR: Required reserve of the commercial banks, ER:
Excess reserve with the central bank)
If in equation (i) we substitute M and H we will get the below mentioned equation:
M CD
+
M = =
+
H C RR ER
+
Divide the right side of the equation with D (Demand deposits)
C D
M D + D
m = = ...(iv)
H C + RR + ER
D D D
C RR ER
If in equation (iv), in place of D , we write c, in place of , we write r and in place of , we
write e, then D D

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