Money Multiplier

Paper Summary:

This paper explains that the money multiplier is the ratio of the stock of money to the stock of high - powered money. The fractional reserve system is a key piece in the money supply process. This paper explains these concepts including tables and graphs.

From the Paper:

"Generally, when a person makes a deposit into his account at a bank, it creates a liability for the bank (University of Colorado, 2004). A liability is basically the bank's obligations, or what it owes. However, the same deposit also creates an asset for the bank. The bank now owns the value of the deposit and will make the money work for the bank, looking for a rate of return that is higher than the interest it pays on the liability. This is how banks make money. By offering customer a return and banking services, banks pull in deposits (liabilities), which creates assets that a bank can lend out. As long as the total return on assets is higher than the payment on liabilities, the bank turns a profit."

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