In the equation M = the quantity of money, m = the money multiplier, MB = the monetary base, what does m equal?

The money multiplier, represented as ( m ), is a crucial concept in monetary economics that measures the maximum amount of money that can be created in the banking system for a given amount of monetary base. In the equation where ( M ) represents the total quantity of money and ( MB ) stands for the monetary base, the money multiplier is defined by the ratio of these two variables, ( m = \frac{M}{MB} ).

This means that for every unit of the monetary base that is available to banks, the total quantity of money that can be generated through the banking system can be several times larger due to the fractional reserve banking system. In simpler terms, banks hold only a fraction of deposits in reserve (known as reserves), lending out the rest to generate additional deposits in the economy.

Thus, by dividing the total quantity of money ( M ) by the monetary base ( MB ), we effectively calculate the extent to which the banking system can expand money supply based on the reserves it holds. This understanding highlights the essential relationship between the monetary base and the broader money supply within an economy.