What is Money Multiplier Class 12 Economics


Are you looking for what is money multiplier, its definition formula as per the syllabus of class 12 Economics CBSE Board?.

I have explained money multiplier from basic to advance specially for class 12 students.

As you might have studied, the commercial bank creates money by public demand deposits. How much would be money creation can be calculated by money multiplier.

In simple language, The multiple by which deposits can increase due to an initial deposit is called money multiplier.

Definition of Money Multiplier

“Money multiplier refers to the process of creation of credit by the commercial banks, with the help of initial deposits made by the public and legal reserve ratio. It is calculated as:

Formula of Money Multiplier

Money Multiplier = 1/LRR

Example of Money Multiplier

If suppose LRR is 10%. The money multiplier would be 10 Times. It implies, money creation would be 10 times of Initial public deposits with the banks.

If Initial deposits is ₹ 1000. As money multiplier is 10 times, money creation would be ₹ 10000.


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