Two types of government interventions have an impact on the economy in macroeconomics. Each one has a multiplier effect associated with it. First, through expansionary fiscal policy, the government can increase aggregate demand (the total amount of goods purchased in an economy) (increasing how much it spends). Perhaps the government will hand out $1,200 checks to everyone. When this occurs, the economic impact is greater than it appears at first glance. These additional effects are caused by the fiscal multiplier, which is the number of times increased government spending circulates.

When a central bank expands the money supply, a different type of multiplier occurs. As a result, banks lend the extra money to people. When those borrowers make purchases, the funds are returned to the bank to be loaned out again. This process of lending money multiple times creates more money than exists. This is known as the money multiplier process.

The money multiplier and the economic multiplier are distinct concepts in economics.

The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money. It is determined by the reserve requirement ratio set by central banks. A lower reserve requirement means a higher money multiplier, allowing more money creation through lending.

The economic multiplier, often associated with fiscal policy, quantifies the impact of a change in spending on the overall economy. For instance, an increase in government spending can lead to a greater increase in GDP. This is because initial spending creates additional income and consumption, leading to further economic activity.

In summary, the money multiplier relates to banking and money supply, while the economic multiplier pertains to overall economic activity.