Explain the process of credit creation …

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Money credit creation -It is a process in which a commercial banks creates total deposit many times the initial deposit. The capacity of commercial banks to create money creation depends on two factors 1.Amount of initial fresh deposit. 2.Legal reserve ratio (LRR). Example -Suppose :Initial Deposit =10000 and LRR =20%. As required the bank to keep 20% that is 2000 as cash reserve and lend the remaining 8000 .Those who borrow use the money for making payments .As assumed those who rec these payments put the money back into their bank accounts.This create a fresh deposit of 8000 The bank again keep 20 % that is 1600and lend 6400 .In this way the money goes on multiplying lending to total money creation of 50000. **MCC = Initial Deposit - Money multiplier. **Money multiplier = 1/LRR. **LRR is a sum of Cash Reserve Ratio and Statutory Liquidity Ratio.