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Multiplier

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In an economic model, a multiplier is a number that quantifies the relationship between the change in one economic quantity and the change in another directly related economic quantity. For example, consider the simple deposit multiplier. This multiplier is part of the multiple deposit creation model of the banking system. The simple deposit multiplier is the number that describes the change in checkable deposits that would follow a change in banking reserves. This multiplier can be shown to have a reciprocal relationship to the reserve requirement for banks in the system. If the reserve requirement is 10%, the simple deposit multiplier is 10. If, for instance, the Federal Reserve increases reserves in the banking system by $100, then a multiplier of 10 implies deposits in the banking system will increase by $1000. The tenfold increase is called a multiplier effect. The term multiplier is also commonly associated with Keynesian economics. The Keynesian multiplier relates an increase in aggregate income to an increase in investment.



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