Page 151 - DECO402_Macro Economics

Macroeconomic Theory Tanima Dutta, Lovely Professional University

Notes Unit-17: Money Multiplier and Credit Creation by
Commercial Banks

Contents
Objectives
Introduction
17.1 Money Multiplier
17.2 Expansion of Credit Money or Credit Creation
17.3 Some Basic Concepts
17.4 Process of Credit Creation or How do Banks Create Credit?
17.5 Limitations of Credit Creation
17.6 Competitive Banking and Credit Expansion
17.7 Do Banks Really Create Credit?
17.8 Money Supply in India
17.9 How does Money Get into the Economy?
17.10 Does Supply of Money in the Economy Depend on the Discretion of the Central Bank?
17.11 Summary
17.12 Keywords
17.13 Review Questions
17.14 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the Money Multiplier,
y Know the Algebraic Expression,
y Know the Supply of Money in India,
y Know the Limitations of Credit Creation

Introduction

Through credit creation, banks increase the supply of money in the economy which has a direct impact
on production, consumption and level of investment and along with it process of development and
prosperity is influenced.

17.1 Money Multiplier

Money multiplier is the ratio of change in supply of money to the change in monetary base. Monetary
base is the sum of currency in circulation and cash reserve of the banks. Consider that if as a result
of a change of `. 10 crores in monetary base, there is a change of `. 30 crores in the supply of money

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