The size of the money multiplier determines the expansion ability of the money supply. The size of the currency multiplier is determined by the following four factors:

1, statutory reserve ratio. The statutory reserve ratio for time deposits and demand deposits is directly determined by the central bank. The higher the general statutory reserve ratio, the smaller the currency multiplier; Conversely, the greater the currency multiplier.

2. Excess reserve ratio. The ratio of the reserves held by commercial banks that exceed the statutory reserves to the total deposits is called the excess reserve ratio. Obviously, the existence of excess reserves reduces the ability of banks to create derivative deposits. Therefore, the relationship between the excess reserve ratio and the money multiplier also changes in the opposite direction. The higher the excess reserve ratio, the smaller the currency multiplier. Conversely, the greater the currency multiplier.

3. Cash ratio. The cash ratio refers to the ratio of cash in circulation to demand deposits in commercial banks. The cash ratio is positively related to the demand for money. Therefore, all factors that affect the demand for money will affect the cash ratio.

4. The ratio of time deposit to current deposit. Because the derivative ability of time deposits is lower than that of demand deposits, central banks have set different statutory reserve ratios for different types of commercial bank deposits. Usually, the statutory reserve ratio of time deposits is lower than that of demand deposits.

Extended data

Benchmark currency

The base currency consists of cash and deposit reserve, and its increase or decrease usually depends on the following four factors:

1. Changes of central bank's creditor's rights to commercial banks and other financial institutions.

This is the most important factor affecting the base currency. Generally speaking, the increase of central bank's creditor's rights means that the central bank will increase its rediscount or re-loan assets to commercial banks, and it also shows that the base money injected into circulation through commercial banks will increase, which will inevitably lead to the increase of excess reserves of commercial banks and the doubling of money supply.

2. Amount of foreign net assets

Foreign net assets include foreign exchange, gold and the net assets of the central bank in international financial institutions. Among them, foreign exchange and gold are purchased by the central bank with the base currency.

3. Net debt to the government

The increase of the central bank's net creditor's rights to the government is usually formed by two channels:

First, directly subscribe for government bonds; The second is to lend money to finance to make up for the fiscal deficit. Either way, it means that the central bank injected the base money into the circulation field through the financial sector.

4. Other items (net)

This mainly refers to the increase and decrease of fixed assets and accounts receivable and payable in the settlement of funds by the central bank. Both will have an impact on the amount of base money.

Baidu Encyclopedia-Base Currency

Baidu Encyclopedia-Currency Multiplier Effect