A textbook illustration of fractional-reserve banking: as banks re-lend everything above a required reserve, an initial deposit can theoretically expand into a much larger total money supply.
How it works
The reciprocal of the reserve ratio gives the money multiplier; multiplying that by the initial deposit gives the theoretical maximum expansion of the money supply as loans are repeatedly redeposited and re-lent.
What this does not include
This does not include real-world constraints on money creation — actual bank lending depends on loan demand, capital requirements, and other regulatory factors far beyond a simple reserve ratio, and modern central banking theory has moved well past this simplified textbook model.
How to use this calculator
- Enter the reserve ratio and initial deposit.
Frequently asked questions
Is this how modern banking actually works?
It’s a simplified textbook model — many economists argue actual bank lending isn’t reserve-constrained the way this model implies, with loans instead creating deposits directly, subject to other regulatory and capital constraints.
What happens if the reserve ratio is very low?
The theoretical money multiplier rises sharply, illustrating why reserve requirements were historically viewed as a lever for controlling the money supply.
Do U.S. banks still face a reserve requirement today?
The Federal Reserve reduced reserve requirements to zero in 2020, though this calculator remains useful as an illustration of the classic textbook concept and for jurisdictions that do maintain a positive reserve ratio.
