Money Multiplier
The maximum amount of money the banking system can create from each dollar of central bank reserves.
What is Money Multiplier?
The money multiplier describes how an initial injection of base money (central bank reserves) can generate a larger total increase in the money supply through the fractional reserve banking system. In its simplest form, the money multiplier equals 1 divided by the reserve ratio. If banks must hold 10% of deposits in reserve, the theoretical multiplier is 10: $1 of new reserves can support $10 of new deposits. In reality, the actual multiplier is lower because banks hold excess reserves, some money is held as cash outside banks, and not all lent money returns as bank deposits. The money multiplier concept links central bank policy (controlling the monetary base) to broad money supply outcomes.
Example
After the 2008 financial crisis, the Federal Reserve dramatically expanded its balance sheet (injecting reserves), but banks held large excess reserves rather than lending them out. The US M2 money multiplier fell below 1 for the first time — meaning that $1 of base money was associated with less than $1 of broad money — because banks were not lending the new reserves into the economy.
Source: Federal Reserve Bank of St. Louis — M2 Money Multiplier