The intuition in the section aboveis sufficient for you to understand how the moneysupply process works. For those of you who are more mathematically inclined, we canderive all of the above results using a concept called the money multiplier, denoted bym, which tells us how much the money supply changes for a given change in the monbase. The relationship between the money supply, the money multiplier, and the monetary base is described by the following equation:M = m X MB (2)The money multiplier m tells us what multiple of the monetary base is transformed into the money supply. Because the money multiplier is larger than 1, the alternative name for the monetary base, high-powered money, is logical: a $1 change in the monetary base leads to more than a $ 1 change in the money supply.
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