The base money multiplier contains a number of assumptions that are very easy to make with the result it is still embedded in macroeconomics over a decade since Goodhart described it as so far removed from reality that its appearance in textbooks amounts to misinstruction What exactly is so misleading about the money multiplier approach Firstly the monetary policy instruments used by central banks for some years is based on short term interest rates set by the central bank not the quantity of base money The base multiplier model requires it to set the quantity of money but in the real world we know it sets the price Secondly if the central bank sets the interest rates it must then supply the reserves the banks require and this will depend on the demand for loans at the going rate of interest the money supply is determined by the economy rather than the central bank The economics of money banking and finance a European text P G A Howells Keith Bain Page 241