Money Multiplier
Money Multiplier Money Multiplier
How Money Multiplier impacts Money Supply Money supply 2 is a function of money multiplier and reserve money. Changes in money multiplier will have impact on the money supply. Factors determining money multiplier are reserve ratio, currency to deposit ratio, creditdeposit ratio. Low reserve ratio, would require banks to keep aside less reserves as CRR, thereby increasing its excess reserves to lend out which increases money supply. Higher reserve ratio will have reverse effect on money supply. Currency to deposit ratio (currency leakage) tells how much public is holding as cash and not re depositing in banks. More cash held by public means lesser deposits thereby reducing the amount bank can lend out resulting in lower money supply. Reverse holds true when less cash is held by public. Credit-deposit ratio indicates how much banks are lending out rather than keeping with themselves. High ratio means banks are lending out more money which in turn would increase money supply. Chart below gives a snap shot of the money supply. 2 Money supply refers to broad money(M3) which is currency with public + Deposits with bank (time+ demand deposits )
Statistics Chart below shows Money supply growth as a function of Reserve money growth and Money Multiplier In ` billion From the above chart, we can see Money supply growth has been supported by increase in money multiplier. Post 2008, creation of reserve money has reduced and increase in money supply has predominantly let to growth in money supply. Since 2011, RBI has reduced CRR, which has led to money multiplier increase thereby increasing money supply. Table below shows data on money supply, reserve money and money multiplier. M3 M0 Money Multiplier FY 2013 3 80319.2 14582.1 5.51 FY 2012 73592.0 14271.7 5.16 FY 2011 65041.2 13768.2 4.72 FY 2010 56027.0 11556.5 4.85 FY 2009 47947.8 9879.6 4.85 FY 2008 40178.6 9282.7 4.33 FY 2007 33100.4 7088.6 4.67 3 Data for FY2013 is till 28 th December 2012
How <strong>Money</strong> <strong>Multiplier</strong> impacts <strong>Money</strong> Supply<br />
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<strong>Money</strong> supply 2 is a function of money multiplier and reserve money.<br />
Changes in money multiplier will have impact on the money supply.<br />
Factors determining money multiplier are reserve ratio, currency to deposit ratio, creditdeposit<br />
ratio.<br />
Low reserve ratio, would require banks to keep aside less reserves as CRR, thereby<br />
increasing its excess reserves to lend out which increases money supply. Higher reserve<br />
ratio will have reverse effect on money supply.<br />
Currency to deposit ratio (currency leakage) tells how much public is holding as cash<br />
and not re depositing in banks. More cash held by public means lesser deposits thereby<br />
reducing the amount bank can lend out resulting in lower money supply. Reverse holds<br />
true when less cash is held by public.<br />
Credit-deposit ratio indicates how much banks are lending out rather than keeping with<br />
themselves. High ratio means banks are lending out more money which in turn would<br />
increase money supply.<br />
Chart below gives a snap shot of the money supply.<br />
2<br />
<strong>Money</strong> supply refers to broad money(M3) which is currency with public + Deposits with bank (time+<br />
demand deposits )
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