I see people claiming the money multiplier effect causes an increase in the money supply. However, a increase in the money supply is inflation. So does the Money Multiplier effect cause inflation? If it doesn’t cause inflation why is it a problem?
I suppose it could be argued that there is a limit to the amount by which money can expand under the multiplier effect. Once that limit is reached (with that limit being a function of the required reserve ratio) there would be no added inflation. Under a 100% reserve banking system, would the multiplier effect even exist?
Sorry if I’m the ignorant one, but I thought that the money multiplier was a fiscal policy thing (ie, government spending?). As such, it doesn’t expand the money supply (which is set by the Fed). Rather, it stimulates demand more times than a single shift as the money filters through the economy (and we note that government not spending the money also has a multiplier effect through market means).
I think the OP is referring to fractional reserves. Yes, fractional reserves causes inflation.
Clayton -