Investor Glossary-multiplier effectInvestor Glossary-multiplier effectInvestor Glossary-multiplier effectInvestor Glossary-multiplier effectInsightful stock market charts - Click here
investor
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Multiplier Effect

The HTML to link to this page
 

The multiplier effect describes how an increase in some economic activity starts a chain reaction that generates more activity than the original increase. The multiplier effect demonstrates the impact that reserve requirements set by the Federal Reserve have on the U.S. money supply. Here's how the multiplier effect works: Suppose the Fed sets reserve requirement at 10%, so a bank can loan $90 of a $100 customer deposit. This $90 is deposited by a borrower in another bank, which loans out $81 (90% of $90). Through the multiplier effect of continuing deposits and loans, the amount of money in circulation increases. The multiplier effect is not completely uniform - eg, some money won't be deposited domestically -- but overall the multiplier effect is apparent. The multiplier effect gives the Fed an important tool for managing the money supply. If it raises reserve requirements from 10% to 15%, only $85 is lent, the multiplier effect diminishes, and money supply growth decelerates.



Rate this multiplier effect definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: average price per share, annual return, irrevocable trust, ex-dividend, inflation, open position, Zero Cost Collar, stock split, quality assurance, Key Rate Duration, deferred revenue, APR, reverse mortgage, minority interest, phantom income, debt service coverage, option premium, real GDP, LIBOR, balance sheet, 1035 exchange, diluted share, ex-dividend date, 144a, command economy, class C shares, cancelled check, in escrow, VIX, covered put, per diem, labor relations, required rate of return, FTSE, wholly-owned subsidiary, FICO score, limit order, implied volatility, dividends payable, liquidity ratio, retained earnings, EBITDA, deferred tax, stock market close, margin rate, current ratio, 401a, risk management, 1031 exchange


Investor Glossary | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
Investor Glossary Index >>> # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
©2004-2014 Investor Glossary - All rights reserved - Terms of Use