William Bransah
School of finance & Financial Management | Business University of Costa Rica
Abstract
The modern banking system is considerably different from what the average person believes it to be. Banks are not institutional moneylenders. They do not simply collect money from people and lend them to others. Instead, banks in the modern world have the power to create money when they lend it out. The process by which this happens is called fractional reserve banking. Under a fractional reserve banking system, banks can expand the total money supply of the system by several times. This expansion of money supply is called the “multiplier effect” and we will study it in detail in this article.
Keywords: Multiplier Effect, Fractional Reserve, Banking Creates Money
