Page 158 - DECO402_Macro Economics

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

Bank A, keeping the cash reserve fund of 10%, gives ` 900 as loan. In such situation, final balance Notes
sheet of bank A will be as follows:

Final Balance Sheet of Bank 'A'

Liabilities ` Assets `
Reserves 100
Deposits 1000
Loans 900
Total 1000 Total 1000
Assume that a person takes a loan of ` 900 from bank ‘A’ and gives a cheque of ` 900 for paying off
debt, to another person who has an account on bank B. then initial balance sheet of bank B will be
made as follows:

Initial Balance Sheet of Bank B

Liabilities ` Assets `
Deposits 900 Reserves 900
Total 900 Total 900
Bank B, after keeping 10 % of primary deposit of ` 900 as cash reserve ratio, gives balance ` 810 as
loan. The final balance sheet of the bank will be as follows:

Final Balance Sheet of Bank 'B'

Liabilities ` Assets `
Reserves 90
Deposits 900
Loans 810
Total 900 Total 900
A person borrows ` 810 from bank ‘B’ and for repayment of debt, gives a cheque of ` 810 to some
other person who has an account with bank C. in such situation, initial balance sheet of bank C will
be made as such:

Initial Balance Sheet of Bank 'C'

Liabilities ` Assets `
Deposits 810 Reserves (CRR) 810
Total 810 Total 810
Bank C, after keeping 10 % of primary deposit of ` 810 as cash reserve ratio, gives balance ` 729 as
loan. The final balance sheet of bank C will be as follows:

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