The money multiplier is the ratio of broad money to base money in a simple textbook model. If banks hold a fraction of deposits as reserves, a given reserve base can support a multiple of deposits.

The model is useful for teaching the arithmetic of fractional-reserve banking, but it is misleading as a description of modern systems. Central banks set a policy rate and supply reserves elastically; banks create deposits when they lend. The quantity of reserves is largely a by-product of policy and demand, not a fixed base that mechanically multiplies.[1]

The Federal Reserve Bank of New York made this point when reserves expanded sharply after 2008.[2]

Sources

  1. McLeay, Michael; Radia, Amar; Thomas, Ryland. Money creation in the modern economy. Bank of England Quarterly Bulletin. 2014. View source Accessed Nov 11, 2026.
  2. Keister, Todd; McAndrews, James. Why Are Banks Holding So Many Excess Reserves?. Federal Reserve Bank of New York, Current Issues in Economics and Finance. 2009. View source Accessed Nov 11, 2026.