The bank credit multiplier (also called the money multiplier) measures the maximum amount of new bank deposits that can be created using each unit of money held as reserves by a bank.

It is calculated using the formula: 1 / reserve ratio.

This concept shows how an initial deposit grows through the banking system:

• When a bank keeps a small portion of money as a reserve, it lends out the rest.
• These loans become new deposits in other banks, which then repeat the process.
• For example, with a 10% reserve ratio, the multiplier is 10. This means an initial deposit of £1,000 can potentially grow into £10,000 in total deposits.