Money Creation by

Commercial Banks.
.
 Money Creation

It is legally compulsory for the banks to

keep a certain minimum fraction of their
deposits as reserves. 
 Why only Fraction of deposits is kept as
Cash Reserves?

 Depositors do not approach the banks for

withdrawal of money at the same time.
 They do not withdraw the entire amount in one go.
  There is a constant flow of new deposits into the
banks.
Legal Reserve Ratio (LRR)
 Fixed by the Central Bank
 .

Reserve Bank Of India

 Money Creation by Banks

Assumptions –
 All banks are One Unit.
 All transactions are routed through the
banks.
 Rs. 1000
L.R.R rate = 20%

1000 x 20 = 200 + 800

100 Reserve Loan
 Example.
Deposits Loans Cash Reserves
Rs Rs (LRR = 20%)
Initial Deposit 1000 800 200
Round I 800 640 160
Round II 640 512 128
- - - -
- - - -
- - - -
Total 5000 4000 1000
 Money Multiplier

1 100
= 20
L.R.R
= 5 times . 
THANK YOU
- Salman Ansari