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.
