Relation Between LRR and Money Multiplier
The lower the LRR, the greater the money multiplier effect and the greater the money creation. The money multiplier is a phenomenon that occurs in the economy when money is created in the form of credit. Based on the fractional reserve banking system, money is created in the market. It is also known as a monetary multiplier or a credit multiplier.
The formula of the Money Multiplier is 1/LRR or 1/r = Money Multiplier,
where LRR denotes the legal reserve ratio. It is the minimum deposit ratio required by law for commercial banks to maintain between themselves and the Reserve Bank of India, also known as the RBI.
What is Money Multiplier?
The Money Multiplier is another name for the monetary multiplier. In layman's terms, it is the multiple by which the banking system can convert deposits received in the form of base money into wide money. It explains how an increase in the monetary base increases the money supply by a multiplied amount.