The money multiplier of the money supply was originally developed by Brunner (1961) and Brunner and Meltzer (1964). It’s been used in empirical analyses of money stock control and the impact of monetary policy actions on other economic variables. One important feature of this model is that it decomposes movements in the money supply into the part that is due directly to Federal Reserve policy actions (the adjusted monetary base) and the part that is due to changes in technology and the tastes and preferences of depository institutions and the public (the money multiplier). The behaviour of the money multiplier has changed considerably over time. From 1870 to 1970, it was relatively stable, fluctuating within narrow limits. Since the 70s it has more than doubled in magnitude. During the last ten years the demand for cash by the public has fallen and the demand for bank deposits has increased considerably. The private sector has made greater use of the banks because they have offered interest rates on deposits in order to attract business. As intermediaries, banks have expanded their assets, and bank lending has increased because of shifts in supply rather than in demand. At the same time, banks have been able to lower their cash reserves and expand their lending. This essay will carefully derive the money multiplier mechanism and it will also explain how monetary authorises can influence its size and the money supply in the economy given the recent financial crisis.

Mishkin (2010) stated that high-powered money or the monetary base is the sum of the central’s monetary liabilities (currency in circulation and reserves) and the Treasury’s monetary liabilities (treasury currency in circulation like bank notes and coins) and whereas money supply is the quantity of money. According to Mishkin (2010), the money multiplier tells us how much the money supply changes for a given change in the monetary base. . The money multiplier currently circulating in the economy (Ms) influences the money supply – it can be manipulated through high-powered money (Hm) in the open market operations.