Define the money multiplier and give its formula.

Step-by-step solution

1. Identify the reserve ratio (rr) as the fraction of deposits banks must keep as reserves.
2. Define the money multiplier (m) as the total money created per unit of reserves.
3. Use the formula $m=\frac{1}{rr}$.
4. Thus the money multiplier equals the reciprocal of the reserve ratio.
5. This multiplier shows how many times the initial reserve can generate deposits.

Concept tested: Money multiplier concept

Published 4 October 2026 · How this solution was prepared and checked