The Monetary System's "Multiplier Effect."

Explained in Layman's Terms.

The same currency in circulation generates many commercial transactions. This is called the The Multipler Effect.

When someone takes a $1000 out of his savings account, the expenditure of that $1000 is "multiplied" many times in a year's time-frame. These "repeated exchanges" of that $1000 generate Commercial Transactions.

The initial expenditure of $1000 turns over, a number of times and, on the average, generates $9000 in commercial transactions.

The average "$9000.00" increase, is NOT in the money supply. It is NOT an increase in actual currency in circulation, (which is just part of the Money Supply), but is an estimate of how many times, a dollar is "exchanged for products or services", in a year.

The trade effect is approx. $9000 to $12,000 of COMMERCIAL TRANSACTIONS, are generated for every $1000, created by the initial expenditure.

This is not a "Loaves and Fishes Effect", as to physical currency, however.

For instance, a simplistic explanation of the "Multiplier Effect", is, you invest a $1000 in inventory, that you borrowed from a bank.
Your supplier takes your $1000 and spends it, also, to buy more supplies.
That means your original $1000 re-enters commerce. Your $1000 generated $2000 in commercial transactions,(yours and his) the moment, he (your supplier) spent it.

Your $1000 has "multiplied" commerce by two times the amount of your inventory purchase.
This is repeated several times, as the person your supplier gave your original $1000 to, will also spend it, and so on, over the time-frame of one year.

Your $1000 expenditure has "multiplied" in the Economy.
However, the currency doesn't multiply. The commerce, generated by the currency, multiplies. The Gross Domestic Product (GDP) is made larger.




The Monetary System's "Accelerator Effect."

Explained in Layman's Terms.

The same $1000 in circulation generates commercial transactions, factored by the The Accelerator Effect, which is the "speed" at which this occurs.

When someone spends a dollar, the dollar is spent many times in a year's time-frame. The "frequency", in a year's time, of these "repeated exchanges" of that dollar, generates a larger Gross Domestic Product (GDP).

Many people mis-state the result of the expenditure of $1,000 by saying that it "creates about $9,000 in new money.
This is not correct.

The "$9000.00" increase, is NOT in the money supply. It is NOT an increase in actual currency in circulation, (which is part of the Money Supply), but is an estimate of how many times, a dollar is turned over in a year, in commerce.

The trade-off is approx. $9000 to $12,000 of COMMERCIAL TRANSACTIONS, are generated for every $1000, created by the initial expenditure.P> This is not a "Loaves and Fishes Effect", as to physical currency, however. It is the frequency of the exchange that creates the Accelerator Effect

For instance, a simplistic explanation of the "Accelerator Effect" is:
You sell all your inventory, you purchased, with the $1000 loan, in one month's time.
You sold it for a total of $1200 in sales revenue.
You have an inventory turnover of 12 a year. That $1000, generated $14,400 in sales.
Actually, you made a gross profit of 12 times "X", as you sold a $1000 inventory, at a 20% markup, which is $1200.
The "X" is $200 times 12, or a gross profit of $2400.
You generated an annual commercial transaction of 12 X $1200, or $14,1400 a year, for a $1000 investment.

Some business turn their inventory 8 to 18 times a year.
Their "Effective Monetary Acceleration" generates more commerce, and more profits, depending on their margins.

The currency doesn't "accelerate". The increase in speed, with which it is exchanged, over a year's time, is the Acceleration Effect.
The commercial exchanges of the $1000 in currency,"accelerate."

The Multiplier Effect and the Acclerator Effect can be effective concurrently. The cumulative, increase in Commercial Transactions from their combined effect, is not easily validated.

Contributed by Bob$$$

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