a ratio between the total deposits they create and the cash in their possession. For the purpose of understanding, it is assumed that all banks are obliged to keep the ratio between cash and its deposits at a minimum of percent. . The banks do not keep any excess reserves, in other words, it would exhaust possible avenues of income earning activities like giving loans etc.
up to the maximum extent after attaining the minimum cash reserves. . There are no drains in the supply of money i,e., the public do not suddenly want to hold more ideal currency or withdraw from the time deposits. Under the above assumptions, when a customer deposits a sum of ₹ in a Primary Deposits It is out of these primary deposits that the bank makes loans and advances to its customers.
The initiative is taken by the customers themselves. In this case, the role of the bank is passive. So these deposits are also called “Passive deposits”. - - Banking bank, the bank creates a deposit of ₹ in his favor.
Bank deposits (Bank Money) have increased by ₹ . But, at this stage, there is no increase in the total supply of money with the public, because the above extra bank money of ₹ is offset by the cash of ₹ deposited in the bank. The bank has now additional cash of ₹ in its custody. Since it is required to keep only a cash reserve of per cent, this means that ₹ is excess cash reserve with it.
According to the above assumption, the bank should lend out this ₹ to the public. Suppose, it does so, and the debtor deposits the money in his own account with another bank B, Bank is creating a deposit of ₹ . Bank B then has also excess cash reserve of ₹ ( - ). It could, in its turn, lend out ₹ .
This ₹ will, in its turn find its way with, say Bank C; it will create a deposit of ₹ 640and