# Credit Creation

Economy Two Sectors Public

\$
Bank

Public .

\$ Bank .

Assumptions     Fractional reserve banking system Demand deposit only No excess reserves No cash leakage .

Illustration ?  Required reserve ratio (RRR) =25%  Jack put \$200 into the bank as an initial demand deposit .

First Round .

First Round \$200 Public \$ Bank .

First Round \$200 Public \$ Bank \$150 .

Second Round .

Second Round \$200 \$150 Public \$ Bank \$150 .

5 \$150 .Second Round \$200 \$150 Public \$ Bank \$112.

Third Round .

5 Public \$ Bank \$112.5 \$150 .Third Round \$200 \$150 \$112.

5 Public \$ Bank \$84.Third Round \$200 \$150 \$112.4 \$112.5 \$150 .

Nth Round .

\$84.5 \$150 Public \$ Bank . . .4 \$63.5 \$84. .Nth Round \$200 \$150 \$112.4 \$112.3 .

.4 \$63. \$84. .3 .5 \$84. .Nth Round \$200 \$150 \$112.5 \$150 Public \$ Bank .4 \$112.

4 5th round : \$63. .3 6th round : 7th round : .Credit Creation 1st round : \$200 2nd round : \$150 3rd round : \$112. .5 4th round : \$84.

Credit Creation Total ? .

Calculation of Credit Creation 1 Bank multiplier = Required reserve ratio Total deposit increment = initial deposit x banking multiplier \$ Bank .

\$ Bank .

Remember ?  Required reserve ratio (RRR) =25%  Jack put \$200 into the bank as an initial demand deposit .

1 Bank multiplier = Required reserve ratio 1 25% = =4 .

Total deposit increment = initial deposit x banking multiplier Total deposit increment = \$200 x 4 = \$800 The maximum amount of deposit created is \$800 .

\$200 RRR=25% Multiplier = 4 Bank \$800 .

P. C. Ed (Part time) Major : Economics Designed by Eric Leung 97 .