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


Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Investor Glossary | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2015 Investor Glossary - All rights reserved - Terms of Use