Deposit Multiplier

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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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RELATED FAQS
  1. How must banks use the deposit multiplier when calculating their reserves?

    The maximum amount of checkable deposits a bank creates through loaning money cannot exceed the amount of the bank's reserves ... Read Full Answer >>
  2. What is the difference between the deposit multiplier and the money multiplier?

    The terms "deposit multiplier" and "money multiplier" are often confused and used interchangeably, because they are very ... Read Full Answer >>
  3. How does the deposit multiplier affect a bank's profitability?

    The deposit multiplier creates the opportunity for a bank to increase profitability, but it can also increase the bank's ... Read Full Answer >>
  4. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  5. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
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    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>

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