The money Multiplier is an interesting method of demonstrating the maximum amount of money that commercial banks could create for a given fixed amount of base money and reserve ratio(It is a portion of reservable aspects that commercial banks hold onto rather than selling out or investing them).

Money Multiplier is the inverse of the reserve requirement. The formula for this method is given below. 

Money Multiplier= 1/Reserve Ratio. 

The theory is seen in every banking system of the country. An increase in bank lending should result in an increase in the country’s money supply. That is why the money multiplier is a crucial component of the banking system. 

Whenever the consumer purchases imports, the money leaves the economy as the taxes will be deducted as a major part of the percentage of your income. It is important to know that not all the money is spent and circulated. Most of the sizable portion is saved by the banks. 

The multiplier effect is mostly taken from a banking and money supply perspective by economists and bankers. The beginning of the money supply is mostly done by the banks with the deposits they receive and keeping a certain amount as savings and thus using the rest of the amount for leading purposes. 

There are two types of reserves that the banks are required to maintain. 

Cash reserves ratio which is the reserves that banks have to maintain with the central bank. 

Statutory Liquidity ratio which shows the number of reserves that the banks are required to maintain in the form of liquid assets. 

The money multiplier helps us to understand how quickly the money supply will grow as a result of bank lending. If the reserve ratio is high then the deposits available for lending will be fewer.

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