What is the reserve multiplier?

The reserve multiplier, also known as the money multiplier, is a financial ratio that indicates the maximum amount of money that a bank can create for every dollar of reserves it holds. It is calculated by dividing 1 by the reserve requirement ratio set by central banks. For example, if the reserve requirement is 10%, the reserve multiplier would be 10, meaning that for every dollar in reserves, banks can theoretically create up to ten dollars in deposits. This concept helps explain how banks influence the money supply in an economy.