The Magic of Money: How Banks Create Credit Have you ever wondered how banks can seemingly conjure money out of thin air? While it might seem like magic, the process of credit creation is rooted in sound economic principles. Let's delve into this fascinating phenomenon. The Foundation of Credit Creation At its core, credit creation is the process by which banks expand the money supply by lending out a portion of their deposits. It's a powerful tool that fuels economic growth, but it's essential to understand how it works. The Role of Fractional Reserve Banking Fractional reserve banking is the bedrock of credit creation. It mandates that banks maintain only a fraction of their total deposits as reserves, typically in the form of cash or deposits with the central bank. This reserve requirement, set by the central bank, ensures that banks have sufficient liquidity to meet customer withdrawals. The Multiplier Effect The key to understanding credit creation lies in the multipl...
This blog is very useful for all competitive Exams and Academics. Ug,pg,PhD, and References