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Commercial bank creates money in the economy comment

Dear student

Commercial banks play an important role of ‘money creator’ in the economy. They have the capacity to generate credit through demand deposits. These demand deposits make credit more than the initial deposits.

The process of money creation can be explained by taking an example of a bank XYZ. A depositor deposits Rs.10,000 in his savings account, which will become the demand deposit of the bank. Based on the assumption that not all customers will turn up on the same day to withdraw their deposits, the bank maintains a minimum cash reserve of 10 % of the demand deposits, i.e. Rs.1000. It lends the remaining amount of Rs.9000 in the form of a credit to other customers. This further creates deposits for the bank XYZ. With the cash reserve of Rs.1000, the credit creation is worth Rs.10,000. So, the credit multiplier is given by:

Credit multiplier = 1/CRR = 1/10% = 10

The money supply in the economy will increase by the amount (times) of credit multiplier.

Regards

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Yes , commercial banks create money via credit creation which refers to multiplying the initial deposits with the bank multiple times its value but only through bank accounts.
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Yes ..through process of credit creation ......it is assumed that there is a single unit of bank and all the transactions held through bank.....and then some part primary deposits are changed into secondary deposits in the way of lending loans........hence credit creation......or money multiplication processes....with the help of CBs....
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