Money multiplier is defined as?

Money multiplier is defined as?

• A. The ratio of the monetary base to the money supply; indicates the total dollars created per $1 addition to the monetary base.
• B. The ratio of currency to deposits.
• C. The ratio of the money supply to the monetary base; indicates the total number of dollars created for each $1 addition to the monetary base.
• D. The ratio of reserves to deposits.

Answer: (C)

The money multiplier shows how much the broader money supply can grow from a given amount of base money. It is defined as the ratio of the money supply (the total money in circulation plus deposits) to the monetary base (currency in circulation plus reserves held by banks). In other words, it tells you how many dollars of money the banking system can create from each $1 added to the monetary base. So the correct idea is that the money supply divided by the monetary base measures the total dollars created for every extra dollar of base money. For example, if the base increases by $1 and the money supply rises by $5, the multiplier is 5, meaning the system expands the money supply fivefold from that base addition. This differs from the other options: one would be the reciprocal of the multiplier (base to money supply), another is the ratio of currency to deposits (currency drain, not the multiplier), and another is reserves to deposits (the reserve ratio, a tool that affects lending but not the multiplier definition itself).

The money multiplier shows how much the broader money supply can grow from a given amount of base money. It is defined as the ratio of the money supply (the total money in circulation plus deposits) to the monetary base (currency in circulation plus reserves held by banks). In other words, it tells you how many dollars of money the banking system can create from each $1 added to the monetary base.

So the correct idea is that the money supply divided by the monetary base measures the total dollars created for every extra dollar of base money. For example, if the base increases by $1 and the money supply rises by $5, the multiplier is 5, meaning the system expands the money supply fivefold from that base addition.

This differs from the other options: one would be the reciprocal of the multiplier (base to money supply), another is the ratio of currency to deposits (currency drain, not the multiplier), and another is reserves to deposits (the reserve ratio, a tool that affects lending but not the multiplier definition itself).