how cash reserve serve as the actual base for generation of demand deposits????

Let us understand this with the help of an example. Suppose, 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 at the same day to withdraw their deposits, 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 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

Hence, we can say that cash reserves serve as the actual base for generation of demand deposits by credit multiplier.

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