Economics

As we accept seen, depone deposits of one form or another constitute by far the largest component of (broad) notes supply. To earn how money supply leads and contracts, and how it can be controlled. It is then incumbent to understand what determines the size of bank deposits. cambers can themselves expand the descend of bank deposits, and hence the money supply, by a form known as ‘credit creation’ To expound the put to work of credit creation in its simplest form, the following assumptions ar do: Banks have just one type of indebtedness i.e. deposits And two types assets which are: {text:list-item} {text:list-item} Assume initially that the have balance sheet of the banks is as shown in the slacken at a lower place: Now assume that the government hands more money-Rs 10 zillion, say, on roads or the National Health Service. It pays for this with cheques haggard on its account with the Central Bank. The peop le receiving the cheques deposit them in their banks. Banks wages these cheques to the Central Bank and their balances correspondingly increase by Rs 10 billion.

The combined banks’ balance sheet now is: and this not the end of the story. Banks now have surplus liquidity. With their balances in the profound bank having increased to Rs 20 billion, they now have a liquidity ratio of 20/110. If they are to return to a 10 % liquidity ratio, they need only observe Rs 11 billion as balances at the Central Bank ( Rs 11 billion/ Rs110 billion = 10%). The remaining Rs 9 billion they can lend to customers. Assume now that customers spend this Rs 9 billion in shops and the shopkeepe rs deposit the cheques in their bank account! s when the cheques are cleared, the balances in the Central Bank of the customers’ banks will duly be deposited by Rs 9 billion, but theIf you want to present a full essay, order it on our website: OrderEssay.net

If you want to get a full information about our service, visit our page: write my essay