The multiplier Effect is when the money supply within an economy increases due to a domino effect from other economic activities.
This effect can be started by a government or company and then branch off into other businesses and the general public.
A main example of a multiplier effect would be when a bank holds a deposit of $200 for a customer.
The bank must hold 20% of it for every $100 of that deposit in reserve and they are then able to lend out the remaining 80% which would be $160 to other customers.
The other customers will then deposit their 80% into another bank, the bank can then hold 20% of the $160 deposit and loan out the other 80% which would be $128.
This one deposit into a bank has led to it being used multiple times by other customers and eventually being deposited into a number of banks.
Another example of a multiplier effect would be if a company wanted to expand and build new premises then they would most likely need to borrow money from a bank to fund their business expansion.
The first step would be to contract a construction company, the construction company would then need to employ more people to carry out the job and would also need to purchase building supplies.
This would then add more revenue to the building supplier allowing them to employ more staff.
Eventually, that one company borrowing money from the bank then stimulates revenue and employment for other businesses like a ripple in water.
Have a Trading Question?
Can't find an answer? Send us your question & we'll answer it