Multiplier Effect

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Multiplier Effect

A measure of the change in a country's money supply that occurs as the result of banks' ability to lend. The multiplier effect is dependent on banks' required reserves, or the amount of money in deposits they are legally required to keep in-house. If a bank has a low reserve requirement, it is able to lend more of its deposit money, which in turn increases the money supply. This indicates a high multiplier effect. On the other hand, a high reserve requirement leads to a low multiplier effect. See also: M1, M2.