Question

''The process of credit creation by commercial banks comes to an end when the total of required reserves become equal to the initial deposits."
With the help of a numerical example, prove that the given statement is true.

Answer 1

The following statement is correct. "The credit creation process by commercial banks concludes when the total of required reserves equals the initial deposits."

Credit creation is a process in which a primary deposit (people's savings) becomes a secondary deposit (people's borrowings), which becomes a new deposit, and so on until the initial deposit equals legal reserves.

Round	Primary Deposit	Secondary Deposit	LRR = 20%
1	1000	800	200
2	800	640	160
3	640	512	128
4	512	........	........
.	.	.	.
.	.	.	.
.	.	.	.
.	.	.	.
Total	5000	4000	1000

`1/"LRR"` × Initial Deposits
= `1/(20%) × 1000`

= 5000

Credit has been created 5 times of initial deposits. When Initial deposits of 1000 become equal to legal reserves of 1000, the process of credit creation comes to an end.