Do you consider a commercial bank 'creator of money' in the economy? (2024)

Standard X

Mathematics

Commercial banks have the capacity to generate credit through demand deposits. These demand deposits makes credit more than initial deposits.

This can be explained by an example, in XYZ bank a depositor deposits Rs 20,000 in his saving account which will become demand deposits of bank.Based on the assumption that banks maintain a minimum cash reserve (CRR) of 10% of demand deposits. It lends remaining amount of Rs 18,000 in form of credit to customers.Credit multiplier is given by :

Creditmultiplier=1CRR

110%=10

The money supply will increase by the amount of credit multiplier.

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