What is the term used to estimate how much a cash deposit will increase the money supply?

The term that refers to the estimation of how much a cash deposit will increase the money supply is known as the Deposit Multiplier. This concept is integral to understanding how banks operate in a fractional reserve banking system. When a bank receives a deposit, a fraction of that deposit is held in reserve while the remaining amount can be loaned out. The process of lending creates additional deposits in the banking system, hence increasing the overall money supply.

The Deposit Multiplier quantifies this increase in money supply by indicating the total amount of money that can be created in the banking system from an initial deposit, based on the required reserve ratio set by the central bank. It is calculated as the inverse of the reserve ratio; for example, if the reserve requirement is 10%, the deposit multiplier would be 10. This means that an initial deposit can effectively lead to a total increase in the money supply of ten times the original amount, enhancing liquidity in the economy and facilitating further lending and spending.

Understanding the Deposit Multiplier is essential for analyzing the implications of monetary policy on the economy, as it illustrates the broader effects of individual banking transactions on the money supply.