Credit expansion

Credit expansion means that an increase in the monetary base, commercial banks borrow money from the central bank, leads to an even higher increase in the money supply than just the increase in the monetary base.

The risk that everyone takes their money out of the bank at the same time is very small, which means that banks can lend deposited money and the result of this is a credit expansion. Credit expansion is limited by the public's willingness to hold money as cash and the reserve ratio. If the public chooses to put the money under the mattress, this will limit the credit expansion.

The bank reserve ratio also limits the credit expansion because banks must hold a proportion of deposited money as reserves that can not be lent out.