The formula to calculate the Money Multiplier (MM) is:
\[ \text{MM} = \frac{1}{\text{RR}} \]
Where:
A money multiplier is defined as the rate of credit creation in a federal reserve banking system. It measures how much the money supply is increased through the banking system when a new deposit is made, based on the required reserve ratio.
Let's consider an example:
Using the formula to calculate the Money Multiplier:
\[ \text{MM} = \frac{1}{0.10} = 10 \]
This demonstrates that with a required reserve ratio of 0.10 (or 10%), the money multiplier would be 10, indicating that the banking system could increase the money supply by 10 times the amount of the initial deposit.
