The money multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply.

The size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves.

**Formula to calculate money multiplier.**

Reserve ratio is the proportion of customers’ deposits that a bank holds as reserves in the form of cash.

**Example:**

Suppose the reserve ratio is 5%, calculate the money multiplier.

Therefore, the money multiplier is 20.