Why is the money multiplier considered to be a potential multiplier rather than an indication of exactly how much multiplication should be expected?
The money multiplier basically measures the potential amount of money that the banking system generates. Some banks might choose not to lend their excess reserves and keep acquiring assets and when this happens we have a reduction of the chain reaction by the amount of excess reserves not loaned out. Also, borrowers may not spend all their bank deposits, and others may put borrowed funds into time deposits, which would have a reduction of the M1 expansion process but won’t have a reduction of the M2 money expansion process
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