The money multiplier is an economic concept that explains how the banking system turns an initial increase in central bank money into a much larger increase in total money supply. It works through the fractional reserve banking system, where banks keep a portion of deposits as reserves and lend out the rest.
The formula is simple: Money Multiplier = 1 / Reserve Ratio. For example, if the reserve ratio is 10%, the money multiplier is 10. This means if the central bank injects 100 taka into the economy, the banking system can potentially expand total money supply to 1,000 taka.
The process starts with an initial deposit. The bank keeps a fraction in reserve and lends the rest. When that loan money gets deposited in another bank, the cycle repeats — each time creating new money in the economy.
In Bangladesh, the money multiplier works the same way. Bangladesh Bank considers this effect when setting monetary policy. By changing the reserve ratio, Bangladesh Bank can influence the money multiplier and control how much money the banking system creates.