Credit creation and credit multiplier
Credit creation is the process by which money lent out by commercial banks using the cheque facility expands to result into greater volume of credit than the amount originally lent out. OR. Credit creation is the process of creating new demand deposits through lending out excess funds to credit worthy customers by commercial banks by use of cheques.
Credit (Bank deposit/ Money) multiplier
Credit multiplier (M) is the number of times the initial bank deposits multiply to give the final bank deposits
Example 1
Calculate the total credit created when the initial deposits are 5,000/= and the cash ratio is 5%
Solution
Total final deposit = 20 x 5000 = 100,000/=
CATEGORIES Economics
TAGS Dr. Bbosa Science
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