# Macroeconomics: The Money Multiplier

• Nov 2nd 2008, 09:50 AM
thejabronisayz
Macroeconomics: The Money Multiplier
I have a question about the money multiplier. I just want to make sure that my understanding of the money multiplier is correct; the textbook is very unclear given the examples and discussions.

My understanding is that the money multiplier would be the inverse of the bank's reserve/deposits ratio (i.e. their reserve ratio). For instance, in my problem, there are \$750 of deposits. \$45 are held as required reserves (6%), and 15 are held in excess (2%). Therefore, the reserve to deposits ratio is 8% (60/750), and the money multiplier would be 12.5 (or 1/.08). I just want to make sure this is correct because my book is very unclear and I want to make sure that the money multiplier is not the inverse of the REQUIRED reserve ratio, but the inverse of the ACTUAL reserve/deposit ratio that the bank has. ]

The only reason I think that my analysis is right is because for one practice problem at the back of the book, it first asks what the money multiplier is when the required reserve ratio is 20%, and in that case the answer was 5. In then asks what the money multiplier is when the required reserve ratio is 10% but the bank holds another 10% in reserves, and it also gives the multiplier in this instance as 5 (i.e. 1/(.10 + .10)). But every definition I see just says it's the required reserve ratio. Any ideas?