# explain the working of money multiplier with the help of numerical example.assume that LLR is 25%

The commercial banks use the money deposited with them to give loans.This function is the basis of credit creation by the banks in the economy. It depends on the Initial amount of deposit and the LRR. It can be iustrated by the following example:

Let us consider that in the economy a the transactions are routed through banks and that the initial deposit with the first bank, let's say,Bank A is of Rs. 1000. Then after subtracting the LRR, the bank will loan out the rest of the money. This money wil go to another bank. The transactions woud be as follows

 Bank Deposits LRR (25%) Lending A 1000 0.25*1000=250 (1-0.25)*1000 =0.75*1000 =750 B 750 0.25*750=187.5 0.75*750 =(0.75)(0.75*1000) =(0.75)2 *1000 =562.5 C 562.5 0.25*562.5=140.6 0.75*562.5 =(0.75)3 *1000 =421.9

And it will go on like this for n times.

Thus, total credit created

= 1000+750+562.5+ .....................+n
= 1000 +( 0.75*1000) + (0.752 * 1000) + (0.753 * 1000) + .................. + (0.75n *1000 )
= 1000 ( 1 + 0.752 + 0.753 + 0.75n )

Applying the formula for infinite GP series ( 1/1-r   ) we get :

Total credit created

= 1000 *  1/1-0.75
= 1000 *  1/0.25
= Initial Deposit *  1/LRR

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Working multiplier refers to the time by which the increase in output income exceeds the increasein investment
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rffrfr
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Money multiplier refers to the process of creation of credit by the commercial banks, with the help of initial deposit made by the public and legal reserve ratio. It is calculated as :
Money Multiplier=1/Legal Reserve Ratio(LR R)
Suppose there is an initial deposit of 1,000 crores and the legal reserve ratio is 25 %, then,
Money Multiplier=1/LR R=1/25=0.04
Total Deposit = Initial Deposit × Money Multiplier = 1,000 × 0.04 = 40 crores
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