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money and intrest rates

S

salonijain

Member
1. If banks hold collectively low liquidity ratio, then there is a liquidity surplus. How?
2. Why is money multiplier smaller than the bank multiplier?
 
The bank multiplier is a theoretical maximum.

The money multiplier is the actual outcome.

The money multiplier will be less than the bank multiplier if:
- not all money is deposited back in the banking system, eg some people might store money at home (under the mattress!) rather than putting it in the bank
- banks might not lend as much money as they are "allowed" to, perhaps because they don't want to and perhaps because people don't want to borrow.
 
Okkk!:)
And what about the liquidity part in the 1st doubt?
Can someone please explain that too
 
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