what is the deposit multiplier 
the deposit multiplier is the maximum amount of money that a bank can create for each unit of money it holds in reserves the deposit multiplier involves the percentage of the amount on deposit at the bank that can be loaned that percentage normally is determined by the reserve requirement set by the federal reserve the deposit multiplier is key to maintaining an economy s basic money supply it s a component of the fractional reserve banking system which is now common to banks in most nations around the world understanding the deposit multiplierthe deposit multiplier is also called the deposit expansion multiplier or the simple deposit multiplier it s connected to the portion of a bank s deposits that can be lent to borrowers this lending activity injects money into the nation s money supply and supports economic activity essentially the deposit multiplier is an indicator of how banks can increase or multiply deposits central banks such as the federal reserve in the united states establish minimum amounts that banks must hold in reserve these amounts are known as required reserves banks must maintain reserves apart from what they loan to ensure that they have sufficient cash to meet any withdrawal requests from depositors 1 the fed pays banks a small amount of interest on their reserves which can be held at the bank or at a local federal reserve bank the deposit multiplier relates to the percentage of funds in reserve it provides an idea of how much money banks could create based on what they have to lend after accounting for reserves the deposit multiplier is the inverse of the percentage of required reserves so if the reserve requirement is 20 the deposit multiplier is 5 here s how that s calculated deposit multiplier 1 20deposit multiplier 5for every 1 a bank has in reserves it is able to increase deposits and theoretically the money supply by 5 through what it lends the amount that a bank can lend from its checkable deposits demand accounts against which checks drafts or other financial instruments can be negotiated depends on the fed s reserve requirement this is fractional reserve banking at work if the reserve requirement is 20 the bank can lend out 80 of money on deposit investopedia sabrina jiangdeposit multiplier vs money multiplierthe deposit multiplier is frequently confused with the money multiplier although the two terms are closely related they are are distinctly different and not interchangeable the money multiplier reflects the change in a nation s money supply created by the loan of capital beyond a bank s reserve 2 it can be seen as the maximum potential creation of money through the multiplier effect of all bank lending the deposit multiplier provides the basis for the money multiplier but the money multiplier value is ultimately less that s because of excess reserves savings and conversions to cash by consumers banks may keep reserves beyond the requirements set by the federal reserve in order to reduce the number of its checkable deposits this can reduce the amount of new money it injects into the nation s money supply 