How Does The Money Multiplier and Reserve Requirement Work?

Imagine you have a piggy bank that can grow money when you put some in it, that’s how the money multiplier and reserve requirement work.

Let's say you're at a bank, and you deposit $100. The bank doesn’t keep all of that money under its mattress; instead, it keeps only part of it, let's say 20%, as reserves, just in case people want to take their money out quickly. That means the bank can lend out the other 80%, or $80.

Now imagine someone borrows that $80 and spends it at a store. The store owner deposits that $80 into another bank, which also keeps 20% as reserves and lends out the rest, $64. This pattern continues: each time money is lent out, it gets multiplied like a growing snowball.

That’s the money multiplier in action, every time banks lend money, they create more money in the economy, just like how stacking blocks can make a taller tower.

So the reserve requirement (how much banks must keep back) and the money multiplier (how much money gets created from each deposit) work together to help grow money in our economy, no magic needed, just clever math! Imagine you have a piggy bank that can grow money when you put some in it, that’s how the money multiplier and reserve requirement work.

Let's say you're at a bank, and you deposit $100. The bank doesn’t keep all of that money under its mattress; instead, it keeps only part of it, let's say 20%, as reserves, just in case people want to take their money out quickly. That means the bank can lend out the other 80%, or $80.

Now imagine someone borrows that $80 and spends it at a store. The store owner deposits that $80 into another bank, which also keeps 20% as reserves and lends out the rest, $64. This pattern continues: each time money is lent out, it gets multiplied like a growing snowball.

That’s the money multiplier in action, every time banks lend money, they create more money in the economy, just like how stacking blocks can make a taller tower.

So the reserve requirement (how much banks must keep back) and the money multiplier (how much money gets created from each deposit) work together to help grow money in our economy, no magic needed, just clever math!