Banks create Credit.Credit creation by commercial banks India & most of the federal reserves in US,UK, & all european countires from a small deposit how Commercials banks & federal reserves create credit  that can be mentioned within the short space of an Essay.

Commercial bank knows that every Investors deposited money in commercials banks cannot be able to withdrawn whole portion of their deposits in a single day. let say Mr.X deposited $10000 in Bank of America. As per rules of Reserve bank of India & federal reserves of US,UK, there is minimum deposits should be kept as reserves with the commercial banks/Federal reserve banks.

Let say 10% of Total deposit of $10000 is equivalent to $1000. So, out of $10000, commercial banks can retain $1000 as reserves & let say that particular investors withdrawn $9000 out of $10000. so, Commercial banks can give loan to others that $1000 to some third party. that third party take this $1000 & put in his personal bank account. In that case, again this $1000 taken by third pary & deposit in some other banks wherein this person can  withdraw $900 &  banks kept $100 as minimum reserves. Again , Banks gives loan to some other person $90 out of $100 & kept $10 as reserves. This process will go on until deposit amout is so small that it cannot generate a fresh loan.

The above example i can set by algebra formulae like below :

Sn=   a/1-r     where  a = first term = $10000, r=10%. where Sn is the summation at the end of n years.

Therefore ,Sn= 10000/1-10%=$11,111

So, from $10000  deposits , it went to $11,111, so there is an increase of $1,111 & so on which commercial banks credit creation.So, from $10000 to $11,111.

U can also check out our homepage for more information on how to get  help with assignments & online tutoring at  http://www.findtutoronline.net

See more at  http://www.findtutoronline.net/blog

Feedback & comments are most welcome.