Question

Describe the process of money creation. Give concrete examples.

Answer 1

Let An individual deposit $1000 in a Bank.

Let the Required reserve is =15%

=1/0.15

=6.66

Money multiplier=1/ required reserve ratio

Money creation= Deposit* money multiplier

When any bank receive deposit for example $1000, then bank keep required reserve $150 and lend remaining money $850. When the person who receive loan $850, then that person deposit the loan amount in another bank, This bank also keep equal to the required reserve $127.5 and remaining money $722.5 are lent to any another person. This process continues until the whole money is lent.

This is the process of money creation.

Total money creation will be = Deposit* money multiplier

=1000*6.66

=$6,660