Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio? Give details and answer the questions fully.

When it comes to lending, this does not operate equally on all financial entities. When we look at an individual commercial bank, we see that this can only lend an amount equal to its excess reserves. This is because the bank cannot rely on the banking system as a whole. Instead, it has to rely only on its own reserves, as this is the risk that the bank is prepared to face. When the commercial banking system in general lends money, it can lend by a multiple of its excess reserves. This is because it can rely on the banking system as a whole, and the risk is diminished by its access to the reserves of several different banks.

The monetary multiplier is the multiple of the excess reserves by which the banking system can expand deposits and thus money supply. This means that the monetary multiplier can determine the amount that the banking system can safely loan. This is the reciprocal of the required reserve ratio, which states the amount of reserves that a bank should hold.

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