Banking and Money Creation

Introduction

• Part of the 100 Days Commerce Masterclass
• Completed Business Studies, now the second part of Economics
• Current Topic: Money Creation or Credit Creation

Money Creation

• Meaning of Money Creation: Creating money
• Role of Commercial Bank: Multiply the deposited money
  • Reserve a portion of the deposit
  • Distribute the remaining as loans

Money Multiplier

• Example:
  • Deposit of 1000 rupees
  • Bank keeps 20% reserve, loans out the remaining 800 rupees
  • This process continues multiple times
  • Eventually forms a total deposit of up to 5000 rupees

Important Points

• Assumption:
  • All transactions happen through the bank
  • Considering all banks as a single entity
• Use of Table:
  • Calculate deposits, loans, and reserves at each step
  • Total reserves equal the initial deposit

Formula

• Money Multiplier Formula:
  • Total deposit / Initial deposit
  • Example: 5000/1000 = 5 times
  • Impact of LRR: Lower the LRR, higher the multiplier

Conclusion

• End of Process: When total cash reserves equal the initial deposit
• Next Chapter: Central Bank

Thank You

• Suggest next chapter
• Good luck with continued study and growth