High Powered Money Multiplier to Credit Creation Essay

High Powered Money Multiplier to Credit Creation - Essay Example The high power money multiplier is based on some assumptions, partial fulfillment and non-fulfillment which impact on income generations. Some of the assumptions include; the supply of goods should be adequate, level of investment should be maintained, the economy should be closed and unchanged marginal propensity to consume. High power multiplier has both advantages and limitations to the economy. When money is deposited into the bank by clients, the money is usually given out to other people in need of loans. The bank ends up getting interests in return. The rule associated with banking usually allows them to set aside some money referred to as reserve. The capital set aside by the bank is important in ensuring the daily cash needs of the bank are met (Steindl, 2010). It also ensures the depositors who come back to the bank to withdraw their money are accounted for. Such kind of banking is known as fractional reserve banking. Due to the reason of loaning out that the depositors’ funds by the company, a money multiplier effect usually result. To an individual the benefits are also withstanding. Through money multiplier an individual is able to acquire a loan from the bank for the purpose of expanding his business. The bank also offers protection and security to the deposited money. The high power money multiplier can aid in capital leverage. It ensures for example, the bank is able to make a lot of money out of the little money spent at the start. The individuals too are able to benefit (Bomhoff, 2008). If 10% is the reserve requirement, a bank may lend out $90 of $100 deposited by the customer. The $ 90 can also be lent to someone else who deposits the same amount to the next bank. The bank in receivership can lend out $81 dollars of the am ount deposited. The initial deposit of $100 can be expanded through the banking system as the process proceeds.