---
title: "Money Multiplier: Definition and Formula | Model Diplomat"
description: "The money multiplier measures how much broad money banks create from central-bank reserves, crucial for understanding monetary policy and banking systems."
url: "https://modeldiplomat.com/learn/glossary/money-multiplier"
---

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Model Diplomat Research Team · Last reviewed June 22, 2026

TL;DR

- The money multiplier is the ratio of the total money supply to the monetary base, measuring how much broad money the banking system creates from each unit of central-bank reserves.
- How is the money multiplier calculated in practice?
- Why is the actual money multiplier lower than 1 divided by the reserve ratio?
- How does the money multiplier differ from the velocity of money?

[Civil Service & Diplomatic Exams](https://modeldiplomat.com/learn/civil-services/glossary)Updated June 22, 2026

The money multiplier is the ratio of the total money supply to the monetary base, measuring how much broad money the banking system creates from each unit of central-bank reserves.

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Example

During India's November 2016 demonetisation, the Reserve Bank of India observed the money multiplier shift sharply as withdrawn ₹500 and ₹1,000 notes returned to bank deposits, raising the deposit-to-base ratio before it normalised through 2017.

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