Money multiplier

In the sphere of lending, of which some arebanks, terms such as credit, deposit and money multiplier are used. For people who are far from economics, it is sometimes difficult to find an interpretation of special terms. Therefore, it is worth considering them in detail in order to understand the functioning of the banking system and the correct interpretation of these concepts.

If you seek clarification for the economicdictionary, there you can find such an explanation of the concept of a credit multiplier: this is the quantitative ratio of the increase in the money supply, which the bank owns, through the operation of the lending mechanism. At the beginning of its operations, the bank has a certain amount that is invested in its capital as a deposit. The money supply (that is, the capital) and its growth, and also the expansion depends on the norms of mandatory reserves, as a policy of economy. As a result, each bank that receives a deposit can add to its reserves a percentage of the amount received. At the same time, the balance, converted into an excess reserve, is transferred on credit. The multiplicity of the expansion of bank capital is inversely proportional to the norm of the existing mandatory reserves.

In turn, the interpretation of the concept of "depositmultiplier "informs the dictionary of business terms. In his interpretation, he is a positive coefficient of the ongoing changes in cash on bank deposits, which is the result of repeated use of the same money supply in the credit and banking market.

Both types of animators are calledmonetary, since both operate on the financial component of the funds. A bank (money) multiplier is an increase in the amount of money supply that arises as a result of the credit and deposit activity carried out by the bank. The Central Bank of the Russian Federation regulates this activity of other commercial banks, for which special requirements for compulsory redundancy are issued.

Only the banking system can handle money animation. A single representative does not have such authority. You can consider a specific example. Credit organizations have a mandatory reserve rate of 5 percent. In case the client places a deposit of one thousand rubles in the bank, fifty rubles of them are transferred to a correspondent account with the Central Bank, and nine hundred and fifty are placed at the disposal of the bank and issued to them on credit. Of this amount, another credit institution transfers five percent to the reserve, and for the remaining amount issues a loan. As a result, the number of non-cash funds in the banking system is increasing.

This process is called credit. It is also called credit expansion. There is an issue of credit money in the banking system. Credit squeeze is carried out when the customer withdraws his credit. The money supply does not change. In this case, it increases or decreases. To calculate the coefficient that a bank, money multiplier has, you need to calculate the ratio between the money supply and the base. If the percentage of obligatory reservation increases, then the possibilities for the banking system to implement credit emissions are reduced, and vice versa.

Bets are reduced if incentives are requiredeconomy. At the same time, there is an increase in the money supply, and interest on loans decreases. Reverse actions are taken if there is a threat of inflation.

In the Russian Federation,the law that only the Central Bank has the right to manage the issue of non-cash money, and therefore it is able to narrow or expand the issuing opportunities of commercial banks. The monetary multiplier is calculated as the coefficient of money increase on deposits of commercial banks during the movement of the financial mass from one bank to another. This indicator can not reach the maximum value, because part of the funds in the free reserve is not directed to credit operations.

The multiplier, as the movement of the money supply, is a continuous process. You can calculate its coefficient only for a certain period.