Q.What is Credit Creation ?

Credit creation is the power of commercial banks to expand deposits and thus the money supply many times over the initial cash reserves, by lending out a part of every deposit. Banks do not keep all deposits idle in their vaults. Since not all depositors withdraw at once, a bank keeps only a small fraction (the cash/legal reserve) and lends the rest. - When a bank grants a loan, it does not hand over cash directly; it credits the amount to the borrower's account, creating a new (derivative) deposit. - That deposit, when spent, comes back into the banking system as a fresh deposit in another bank, which again lends out a part of it. - This chain repeats, so a single primary deposit leads to a multiple expansion of total deposits — the money supply is a multiple of the original cash. - The extent of creation depends on the cash reserve ratio: the lower the …