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This means that for every $1 deposited, the banking system can potentially create $16.67 in new money.

Why the Actual Multiplier Might Be Lower

The actual deposit multiplier may be lower than the theoretical one due to several factors:

1. Excess Reserves: Banks may choose to hold excess reserves beyond the required amount, reducing their lending capacity.
2. Loan Demand: If there is low demand for loans, banks may not lend out all of their excess reserves.
3. Currency Drain: People may choose to hold cash instead of depositing it in banks, reducing the amount of money available for lending.

Impact of Chastity’s Deposit

• Bank A’s reserves immediately increase by $25,000.
• Bank A’s required reserves increase by $3,750 (15% of $25,000).
• Bank A’s excess reserves increase by $21,250 ($25,000 – $3,750).
• Bank A can make a maximum new loan of $21,250.
• Checking account deposits in the banking system as a whole could eventually increase to a maximum of $166,667 ($25,000 * 16.67).

This process, known as the money creation process, demonstrates how banks can expand the money supply by making loans.

The Money Multiplier’s Impact on the Economy The money multiplier plays a crucial role in influencing economic activity. A higher multiplier can lead to increased lending, investment, and economic growth. Conversely, a lower multiplier can limit economic growth and job creation. Central banks often use monetary policy tools to adjust the required reserve ratio and influence the money multiplier to achieve macroeconomic objectives, such as controlling inflation and stimulating economic growth.