G&G 2.0 Series - Day 9 Lecture Notes
Introduction
- Day 9 of G&G 2.0, a 21-day series.
- Emphasis on regular attendance and active participation.
- Importance of continuous hard work for drastic change.
Banking Topic: Money Multiplier
- Concept: Creation of credit by commercial banks using initial deposits.
- Process: Money deposited is multiplied by banks, increasing the money supply.
Key Definitions and Formula
- Money Multiplier: Process of multiplying money deposited in commercial banks.
- Formula: Money Multiplier = 1 / LRR (Legal Reserve Ratio)
Process Explanation
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Banking System Assumptions:
- Entire banking system treated as one unit ("bank").
- All transactions occur through the bank, not in cash.
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Deposits and Loans:
- Banks maintain a reserve (LRR) and distribute the rest as loans.
- Example:
- Initial Deposit = 1000
- LRR = 20% = 0.20
- Money Multiplier = 1 / 0.20 = 5
- Bank transforms 1000 into 5000 through loans.
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Cycle of Money Creation:
- Initial deposit of 1000.
- Bank reserves 20% (200) and loans out 800.
- Loan recipient spends 800, goes back to bank (800 deposit).
- Process repeats with decreasing amounts until total reserves = initial deposit.
Observations
- Inverse Relationship: Multiplier and LRR are inversely related. Lower LRR leads to more money creation.
- Total Deposit Calculation: Total deposits become multiple of initial due to repeated cycles.
Example Calculation
- Total Deposits = Initial Deposit x Money Multiplier
- For 1000 initial deposit at 20% LRR:
- Total Reserves = 1000
- Total Deposits = 5000
Summary
- Banks create multiple credits from initial deposits through the money multiplier process.
- Legal requirements compel banks to keep a reserve fraction (LRR), influencing money multiplication.
Closing Remarks
- Banking topic completed.
- Follow-up with a video on Indian ICO Unit 1.
- Importance of short breaks and continuous learning.
Note: Make sure to review and understand the full process of money multiplication and the impact of LRR on banking operations.