What factors affect the money multiplier? Check Answer at BYJU’S (2024)

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What factors affect the money multiplier? Check Answer at BYJU’S? ›

The factors affecting the money multiplier are excess reserves ratio, currency ratio, and required reserves ratio.

The size of the multiplier effect can be affected by a number of factors, including the marginal propensity to consume, the size of the initial change in spending or taxes, the level of spare capacity in the economy, and the nature of the goods and services being produced.

The money multiplier is the amount of money that banks create as deposits with each unit of money it is keeping as a reserve. It is determined as the ratio of the total money supply by the stock of high powered money in the economy. M m = M / H.

In fractional reserve banking, the money multiplier (or deposit multiplier) effect shows how banks can re-lend a portion of the deposits on-hand to increase the amount of money in the economy. In this way, commercial banks have a large degree of influence on economic outcomes.

Explain the money multiplier effect. The money multiplier effect is the expansion of the money supply as a result of commercial banks' lending their depositors' money to others. To decrease the money supply, how would the Fed change the discount rate? It would increase the discount rate.

A bank loans or invests its excess reserves to earn more interest. A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar. The increase in the money supply is the money multiplier.

The multiplier effect refers to the effect on national income and product of an exogenous increase in demand. For example, suppose that investment demand increases by one. Firms then produce to meet this demand. That the national product has increased means that the national income has increased.

A multiplier is a factor that amplifies or increases the base value of something else. For example, in the multiplication statement 3 × 4 = 12 , the multiplier 3 amplifies the value of 4 to 12. But it need not be the case always. If the multiplier is 1, the value of the multiplicand remains the same in the product.

The multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income. This injection of demand might come for example from a rise in exports, investment or government spending.

How do you solve money multiplier? ›

The formula for the money multiplier is simply 1/r, where r = the reserve ratio. A little too easy, right? It's the reciprocal of the reserve ratio. When r is the reserve ratio for all banks in an economy, then each dollar of reserves creates 1/r dollars of money in the money supply.

This includes reserves held by financial institutions at the central bank and cash in circulation. These are the primary components of the money supply within an economy. Factors influencing these components include interest rates, political stability, economic growth, and inflation expectations.

Byju's consolidated revenue saw a surge of 54.2 percent, climbing from Rs 2,428 crore in FY21 to Rs 5,298 crore in FY22. However, this growth was overshadowed by the company's net losses, which increased from Rs 4,564 crore in FY21 to a staggering Rs 8,245 crore in FY22, Moneycontrol reported.

The factors affecting the money multiplier are excess reserves ratio, currency ratio, and required reserves ratio.

Interest on excess reserves decreases the cost of holding them. As a result, banks are willing to hold more reserves relative to other assets, and they have less incentive to expand their balance sheet. This is likely to explain the decrease in the money multiplier.

An increase in the reserve ratio will decrease the size of the monetary multiplier and decrease the excess reserves held by commercial banks, thus causing the money supply to decrease.

Changes in the size of the leakages—a change in the marginal propensity to save, the tax rate, or the marginal propensity to import—will change the size of the multiplier.

The extent of the investment multiplier depends on two factors: the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). A higher investment multiplier suggests that the investment will have a larger stimulative effect on the economy.

An increase in the reserve ratio will decrease the size of the monetary multiplier and decrease the excess reserves held by commercial banks, thus causing the money supply to decrease.

The multiplier effect is the relationship between the reserves in a bank and the money supply. The money multiplier is the number one can use to calculate what a change in reserves could do to the money supply. The formula for the money multiplier is 1/r where r is the reserve ratio.