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�

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Credit Creation

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Economy�Two Sectors

Public

$

Bank

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Public

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$

Bank

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Assumptions

Fractional reserve banking system
Demand deposit only
No excess reserves
No cash leakage

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Illustration

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

?

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First Round

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Public

$

Bank

First Round

$200

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Public

$

Bank

First Round

$200

$150

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Second Round

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Public

$

Bank

Second Round

$200

$150

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Public

$

Bank

Second Round

$200

$150

$112.5

$150

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Third Round

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Public

$

Bank

Third Round

$200

$150

$112.5

$150

$112.5

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Public

$

Bank

Third Round

$200

$150

$112.5

$150

$112.5

$84.4

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Nth Round

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Public

$

Bank

Nth Round

$200

$150

$112.5

$150

$112.5

$84.4

$63.3

.

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Public

$

Bank

Nth Round

$200

$150

$112.5

$150

$112.5

$84.4

$63.3

.

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Credit Creation

1st round : $200

2nd round : $150

3rd round : $112.5

4th round : $84.4

5th round : $63.3

6th round : .

7th round : .

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Credit Creation

Total

?

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Calculation of Credit Creation

Bank multiplier =

1

Required reserve ratio

Total deposit increment

= initial deposit x banking multiplier

$

Bank

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$

Bank

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Remember

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

?

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=

1

25%

Bank multiplier =

1

Required reserve ratio

= 4

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Total deposit increment

= initial deposit x banking multiplier

Total deposit increment

= $200 x 4

= $800

The maximum amount

of deposit created

is $800

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$200

RRR=25%

Bank

$800

Multiplier = 4

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MRS. KAMLESH UTTAM

PGT ECONOMICS

JNV FAROUR

FATEH GARH SAHIB

PUNJAB

MRS. KAMLESH UTTAM

PGT ECONOMICS

JNV FAROUR

FATEH GARH SAHIB

PUNJAB