Question

Do you consider a commercial bank 'creator of money' in the economy?

Answer 1

Commercial banks have the capacity to generate credit through demand deposits. These demand deposits makes credit more than initial deposits.

This can be explained by an example, in XYZ bank a depositor deposits Rs 20,000 in his saving account which will become demand deposits of bank.Based on the assumption that banks maintain a minimum cash reserve (CRR) of 10% of demand deposits. It lends remaining amount of Rs 18,000 in form of credit to customers.Credit multiplier is given by :

$Creditmultiplier=\frac{1}{CRR}$

$\frac{1}{10\%}=10$

The money supply will increase by the amount of credit multiplier.