Credit Creation

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Credit Creation
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EconomyTwo Sectors
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Public
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(No Transcript)
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Assumptions

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

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Illustration
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• 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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First Round
200
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First Round
200
150
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Second Round
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Second Round
200
150
150
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Second Round
200
150
112.5
150
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Third Round
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Third Round
200
150
112.5
112.5
150
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Third Round
200
150
112.5
84.4
112.5
150
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Nth Round
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Nth Round
200
150
112.5
84.4
63.3
. . . .
84.4
112.5
150
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Nth Round
200
150
112.5
84.4
63.3
. . . .
84.4
112.5
150
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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
Total deposit increment initial deposit x
banking multiplier
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(No Transcript)
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Remember
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• Required reserve ratio (RRR) 25
• Jack put 200 into the bank as an initial demand
  deposit

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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
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200
RRR25
Multiplier 4
Bank
800
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P. C. Ed (Part time)Major Economics

• Designed by
• Eric Leung
• 97