Money Multiplier and High-Powered Money (Monetary Base)

1) High-powered money (H) / Monetary base: meaning

High-powered money (H), also called the monetary base, is the foundation on which the banking system creates a larger money supply.

At an intro level:

where:

• $C$ = currency held by the public
• $R$ = bank reserves (cash with banks + deposits with RBI)

Because both currency and reserves ultimately come from the central bank, H is “high-powered”.

2) Money multiplier: meaning

The money multiplier shows how a given monetary base (H) can support a larger money supply (M):

where $m$ is the money multiplier.

Intuition:

• Banks keep only a fraction of deposits as reserves.
• The remainder is lent out.
• Loans become deposits elsewhere, creating multiple rounds of deposit expansion.

3) A standard multiplier formula (conceptual CUET-level)

A commonly used form:

where:

• $c$ = currency–deposit ratio $(C/D)$
• $rr$ = reserve ratio $(R/D)$ (can be thought of as required reserves fraction; conceptually includes CRR and desired excess reserves)