Money multiplier
... the rrr=.2 then they would place $200 in reserves creating $800 dollars of excess money that they can then lend out. That $800 would then end up in bank B. bank B would place 20% of that in the reserve, leaving them with $640 in excess reserve. This would continue until there was no more money for the banks to hold, but in this process the initial $800 excess from bank A would create, a total of $4,000 in new money. Using this we can create an equation for finding the multiplier. The reciprocal of the reserve ratio or 1/R is going to equal the multiplier. In our example given that r=.2 then the monetary multiplier would equal 1/.2 or 5. With 5 as the known multiplier we can the put that into an equation to see how much new money will be created. By taking the initial excess reserve of bank A ($800) and inserting it into the equation D=E x M, where D equals the new amount of checkable deposits, E= excess reserve from bank A and m= equals the multiplier. D=E x m D= $800 x 5 D= $4000 With the multiplier of 5 the $800 in excess from bank A has turned into $4000 of new money. The monetary multiplier is controlled by the Reserve Requirement Ratio, the higher the ratio the less amount of new money that w...