The working of money multiplier how adjustments by banks and the
public following an increase in the monetary base produce a multiple expansion
of the money stock.
1. 100- Percent Reserve Banking System:
The system assumes a world where there are no banks. The public, say Rs.1000, holds all the money in the economy, in the liquid form. Assume the bank enters at this stage. Initially the banks accept deposits providing a secure place for the depositors to park their money and do not make any loans. The system is known as the 100 percent reserve banking system.
Reserves are deposits banks receive but not lent out. Assumed that all of the deposits are held as reserves by the banks until the depositors withdraw the money or writes a check against the balance in the deposit. For the bank assets are Rs.1000 that it holds as reserves its liabilities are Rs.1000 which it owes to depositors. Since the bank has not granted any loans, it will not earn any income. Hence, it will have to cover its costs from the small amount of fees, if any, that it charges from its depositors. As far as the supply of money is concerned, it will remain Rs.1000. Thus in a 100 percent reserve -banking system the supply of money remains unaffected.
1. 100- Percent Reserve Banking System:
The system assumes a world where there are no banks. The public, say Rs.1000, holds all the money in the economy, in the liquid form. Assume the bank enters at this stage. Initially the banks accept deposits providing a secure place for the depositors to park their money and do not make any loans. The system is known as the 100 percent reserve banking system.
Reserves are deposits banks receive but not lent out. Assumed that all of the deposits are held as reserves by the banks until the depositors withdraw the money or writes a check against the balance in the deposit. For the bank assets are Rs.1000 that it holds as reserves its liabilities are Rs.1000 which it owes to depositors. Since the bank has not granted any loans, it will not earn any income. Hence, it will have to cover its costs from the small amount of fees, if any, that it charges from its depositors. As far as the supply of money is concerned, it will remain Rs.1000. Thus in a 100 percent reserve -banking system the supply of money remains unaffected.
2. The Fractional Reserve
Banking System:
Fractional Reserve Banking refers to a banking system that needs the commercial banks to maintain only portion of the money deposited with them in the form of reserves. The bank makes payment of interest on all deposits customers make made and uses the deposited money to create new loans.
In India, reserve bank controls the flow of money within economy and protects the funds of depositors. So, it determines the reserves ratio that every bank has to keep in the form of cash out of total funds deposited. Because fractional reserve banking is a mere a part of total deposit of customers of bank which will be in liquid form. Rest of money deposited bank uses for issuing different loans.
Main aim of fractional reserve is to make available cash for depositors whenever they need it. In India, bank has to calculate some reserve out of total deposited money.
Fractional Reserve Banking refers to a banking system that needs the commercial banks to maintain only portion of the money deposited with them in the form of reserves. The bank makes payment of interest on all deposits customers make made and uses the deposited money to create new loans.
In India, reserve bank controls the flow of money within economy and protects the funds of depositors. So, it determines the reserves ratio that every bank has to keep in the form of cash out of total funds deposited. Because fractional reserve banking is a mere a part of total deposit of customers of bank which will be in liquid form. Rest of money deposited bank uses for issuing different loans.
Main aim of fractional reserve is to make available cash for depositors whenever they need it. In India, bank has to calculate some reserve out of total deposited money.
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