Money Multiplier vs Spending Multiplier
Money Multiplier and Spending Multiplier are related concepts in AP Economics that students often mix up. In short: money multiplier is the money multiplier is the maximum amount the money supply can increase for each dollar of new bank reserves. Meanwhile, spending multiplier is the spending multiplier measures how much real GDP changes for each dollar change in autonomous spending. Here is how they compare side by side.
The money multiplier is the maximum amount the money supply can increase for each dollar of new bank reserves.
It equals the reciprocal of the required reserve ratio, assuming banks lend all excess reserves and the public holds no extra cash. A lower reserve ratio gives a larger multiplier. Real-world leakages make the actual multiplier smaller.
The spending multiplier measures how much real GDP changes for each dollar change in autonomous spending.
A higher marginal propensity to consume produces a larger multiplier because more of each dollar is re-spent. It is used to estimate the GDP impact of fiscal policy. It assumes spare capacity and ignores crowding out.
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