Maximum total demand deposit money:

The maximum total demand deposit money (M_dep) that the entire commercial banking system will create given an initial deposit (A) and statutory cash reserve ratio (r) can be obtained using the formula:

M_dep = A/r or (1/2)

According to equation, the deposit multiplier is the reciprocal of the cash reserve ratio maintained by the banking system. The higher the cash ratio, the lower the deposit multiplier and the lower the demand deposit expansion, vice versa. Multiplier and the lower the demand deposit expansion, vice versa. Multiple demand - deposit expansion occurs when an initial cash deposit causes an expansion of the money supply by a multiple of the initial deposit.

The assumptions underlying the process of deposit money creation are:

i. The banking system is comprised of many banks.

ii. There is no cash leakage in the system.

iii. The statutory cash reserve ration i.e . the percentage of the total deposit liabilities of the banks that they are legally required to keep with the Central Bank is given.

iv. All banks in the system are willing and able to make loans to the limit set by cash reserve requirements.

v. The initial deposit of a customer in his current account is given.