Deposit Multiplier

DEFINITION of 'Deposit Multiplier'

A function that describes the amount of money created in a bank's money supply. This money is created by lending money that is in excess of its required reserve to borrowers.

Calculated as:

Deposit Multiplier

BREAKING DOWN 'Deposit Multiplier'

The Federal Reserve and other central banks require that banks must hold a minimum amount (required reserve) of money in their reserves in order to fulfill withdrawal requests from depositors. Banks are then allowed to lend out any excess to borrowers (such as for mortgages), while the liability incurred as a result of depositors is still on the books.

For example, suppose that the required reserve ratio is 25%. This means that the deposit multiple is four. For banks, this means that for every $4 that is deposited, a total of $1 must be kept in reserves.

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