understanding financial jargon
The money multiplier is the number of times a given amount of money in the economy can be used to create credit. For example, if a person deposits £100 in a bank, the bank will keep a fraction of that avaiblble to draw on (say £15) and will lend the remainder to a business or individual. If the persons account is a savings account rather than a debit account the bank will assume they won't draw upon those savings for some time, and that it is safe to lend the larger portion (£85) to someone else.
The person who borrows that money may deposit it in their bank account. Their bank will keep some in reserve and then lend the remainder to someone else. This process can go on until the amount available for lending is too small to be lent. The amount of credit generated by this process can be much greater than the original £100 cash value.
Of course this money multiplier effect can only continue to happen as long as depositors don't all go to a bank and ask for their money back at the same time. If this happens, there will be a 'run' on the bank, where the bansk does not have enough cash resources to pay all depositers.
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
We hope you found this information useful.
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