The Money Supply Multiplier.

We see that there is a new kind of multiplier operating on reserves. For every additional dollar in reserves provided to the banking system, banks eventually create $10 of additional deposits or bank money. We described the expenditure multiplier as the ratio of ‘the change in output to new investment or other spending. The money multiplier is the into of the new money created to the change in reserves. Note that the arithmetic of Expansion is similar to that of the expenditure multiplier, but don’t confuse the two because they multiply Tlingit taillights. The amplification here is from the stock of reserves to the stock of total M; it has nothing to do with the extra output induced by investment or money.

The process of deposit creation can also work in  reverse when a drain in reserves reduces hank money. It is useful to reinforce your understanding of money creation by tracing in detain what happens when the Fed permanently destroys $2000 of reserves by selling a government hind to someone who withdraws cash from his checking account to pay for it. In the end, the Withdrawal of $2000 of reserves from  the banking system kills off $20,000 worth of deposits throughout the whole system.

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