Interest Rate

Interest rate rises makes money more expensive thus reducing the incentives for taking out loans, while making saving more rewarding. That is the reason why when a central bank is trying to grow the economy, it will keep rates low (borrowing is cheap => companies borrow for investment => more production capability => more jobs => more wealth), while if it still trying to slow down the economy (e.g. inflation is high) the central bank will increase interest rates.

The principle of the base multiplier is that but lending banks multiply the money available in the system. For example £100 are issued by the BoE and put into the system, one banks takes it and lends £80 to another bank, who then lends £64 and so on, thus creating money.

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In this brief example, I’m assuming each bank lends 80% of the money they have and in reality the amount is driven reserve ratio, with the multiplier effect being calculated as 1/reserve ratio. Assuming the 12.5% reserve ratio mentioned in Q5 above, the multiplier would be 1/0.125, meaning that each £1 issued by the BoE, is multiplied and thus becomes £8 available in the system