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Credit Creation

Credit Creation. $. Public. Bank. Economy Two Sectors. Public. $. Bank. Assumptions. Fractional reserve banking system Demand deposit only No excess reserves No cash leakage. Illustration. ?. Required reserve ratio (RRR) =25%

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Credit Creation

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  1. Credit Creation

  2. $ Public Bank EconomyTwo Sectors

  3. Public

  4. $ Bank

  5. Assumptions • Fractional reserve banking system • Demand deposit only • No excess reserves • No cash leakage

  6. Illustration ? • Required reserve ratio (RRR) =25% • Jack put $200 into the bank as an initial demand deposit

  7. First Round

  8. $ Public Bank First Round $200

  9. $ Public Bank First Round $200 $150

  10. Second Round

  11. $ Public Bank Second Round $200 $150 $150

  12. $ Public Bank Second Round $200 $150 $112.5 $150

  13. Third Round

  14. $ Public Bank Third Round $200 $150 $112.5 $112.5 $150

  15. $ Public Bank Third Round $200 $150 $112.5 $84.4 $112.5 $150

  16. Nth Round

  17. $ Public Bank Nth Round $200 $150 $112.5 $84.4 $63.3 . . . . $84.4 $112.5 $150

  18. $ Public Bank Nth Round $200 $150 $112.5 $84.4 $63.3 . . . . $84.4 $112.5 $150

  19. CreditCreation 1st round : $200 2nd round : $150 3rd round : $112.5 4th round : $84.4 5th round : $63.3 6th round : . 7th round : .

  20. Credit Creation Total ?

  21. $ 1 Required reserve ratio Bank multiplier = Bank Calculation of Credit Creation Total deposit increment = initial deposit x banking multiplier

  22. $ Bank

  23. Remember ? • Required reserve ratio (RRR) =25% • Jack put $200 into the bank as an initial demand deposit

  24. 1 Required reserve ratio 1 25% Bank multiplier = = = 4

  25. Total deposit increment = initial deposit x banking multiplier Total deposit increment = $200 x 4 =$800 The maximum amount of deposit created is $800

  26. $200 RRR=25% Multiplier = 4 Bank $800

  27. P. C. Ed (Part time)Major : Economics Designed by Eric Leung 97

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