Money Multiplier: Meaning, Formula, Working and Importance

Key Takeaways
 

• With the help of the money multiplier, we can analyse how much money the banking system can create from deposits.
   
• This concept is very important for exams like the money multiplier UPSC.
   
• The money multiplier in India depends mainly on CRR and public savings habits
   
• A higher multiplier indicates more money supply in the economy.

A lot of people ask what is money multiplier? The money multiplier is a very simple concept in economics. It helps us to analyse how much total money is created in the economy when the banks receive deposits.

When we deposit our money in a bank, the bank keeps a small part and lends the rest. This process continues again and again, which increases the total money.

For students who are preparing for the money multiplier UPSC its extremely important concept. It explains how the banking system increases the money supply.

How to Calculate Money Multiplier?

The formula is  

Money Multiplier = 1 / Reserve Ratio (CRR)
 

Example:

If CRR is 10%, the money multiplier is 10.

So, a ₹1,000 deposit can create ₹10,000 in total money.

Money Multiplier in India

The Reserve Bank of India (RBI) mainly controls the money multiplier in India. The RBI changes CRR to control liquidity.
 

• Lower CRR means a higher multiplier, which means More money supply
• A higher CRR is a lower multiplier, and less money supply

In India, the multiplier mainly ranges between 5 to 7, which depends on banking behaviour and savings patterns.

Money Multiplier FD ICICI 

Let’s understand with a simple money multiplier FD ICICI example:

Let’s say 

You deposit ₹10,000 in ICICI Bank FD
 

• The bank keeps 10% (₹1,000)
• Lends ₹9,000

This ₹9,000 again gets deposited and lent further. This chain increases total money in the system.

So even one FD can contribute to the money multiplier effect indirectly.

Money Multiplier in an Economy Increases With

The money multiplier in an economy increases with the following factors:
 

If people will keep money in banks instead of cash at home, banks can lend more, which increases the multiplier. 

Bonus tip 

A lower CRR always increases banks' lending power and boosts money creation in the economy, but on the other hand, a high CRR reduces the lending that lowers the overall money multiplier effect.

Conclusion

The money multiplier is a very important concept in economics. It helps us understand how banks create money and how RBI controls the economy. Whether you are a student or investor, knowing how to calculate money multiplier can help you understand financial systems better.

FAQs

1. Why is the money multiplier important?

It helps control money supply, inflation, and economic growth.

2. What happens if the money multiplier increases?

More money flows in the economy, which can boost growth but may also increase inflation.

3. Should I go for ICICI Money Multiplier FD? 

Yes, you can go for ICICI money multiplier FD if you want higher returns with some liquidity, but before that, make sure that you check the terms carefully.

4. How exactly does money multiply when the bank lends money?  

Banks lend deposits, which get redeposited and re-lent, increasing the total money.

5. What is the 'real' formula of Money Multiplier?  

The real formula of the money multiplier is 1/Reserve Ratio (CRR).

6. How does the money multiplier works? 

It works through repeated deposit and lending cycles in banks.