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Question : 17
Total: 52
"The process of credit creation by commercial banks comes to an end when the total of required reserves become equal to the initial deposits."
With the help of a numerical example, prove that the given statement is true.
With the help of a numerical example, prove that the given statement is true.
Solution:
Given statement is true which says that. "The process of credit creation by commercial banks comes to an end when total of required reserves become equal to the initial deposits."
Credit creation is a process in which primary deposit (saving of people) becomes a secondary deposit (borrowings of people), which in turn becomes a new deposit and this process continues till initial deposit becomes equal to legal reserves. Credit Creation = 1 ∕ LRR × Initial Deposits
= 1 ∕ 20 % × 1000 = 5000
Credit has been created 5 times of Initial Deposits. When Initial deposits of 1000 become equal to legal reserves of 1000, the process of credit creation comes to an end.
Credit creation is a process in which primary deposit (saving of people) becomes a secondary deposit (borrowings of people), which in turn becomes a new deposit and this process continues till initial deposit becomes equal to legal reserves.
Credit has been created 5 times of Initial Deposits. When Initial deposits of 1000 become equal to legal reserves of 1000, the process of credit creation comes to an end.
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