Examples of credit creation roles of bank
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Total Credit Creation = Original Deposit * Credit Multiplier Coefficient
Credit multiplier coefficient= 1 / r where r = cash reserve requirement also called as Cash Reserve Ratio (CRR)
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Credit multiplier co-efficient = 1/10% = 1/ (10/100) = 10
Total credit created = 10,000 *10 = 100000
If CRR changes to 5%,
Credit multiplier co-efficient = 1/5% = 1/ (5/100) = 20
Total credit creation = 10000 * 20 = 200000
Thus, it can be inferred that lower the CRR, the higher will be the credit creation, whereas higher the CRR, lesser will be the credit creation. With the help of credit creation process, money multiplies in an economy. However, the credit creation process of commercial banks is not free from limitations.
Credit multiplier coefficient= 1 / r where r = cash reserve requirement also called as Cash Reserve Ratio (CRR)
ADVERTISEMENTS:
Credit multiplier co-efficient = 1/10% = 1/ (10/100) = 10
Total credit created = 10,000 *10 = 100000
If CRR changes to 5%,
Credit multiplier co-efficient = 1/5% = 1/ (5/100) = 20
Total credit creation = 10000 * 20 = 200000
Thus, it can be inferred that lower the CRR, the higher will be the credit creation, whereas higher the CRR, lesser will be the credit creation. With the help of credit creation process, money multiplies in an economy. However, the credit creation process of commercial banks is not free from limitations.
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