Statement 1: Money creation by Commercial Banks raises the National Income.
Statement 1: Money creation by Commercial Banks raises the National Income.
Statement 2: Through credit creation, Commercial Banks are able to create credit, which is in far excess of the initial deposits.
Alternatives:
(a) Both the Statements are true
(b) Both the Statements are false
(c) Statement 1 is true and Statement 2 is false
(d) Statement 2 is true and Statement 1 is false
Anurag Pathak Changed status to publish January 6, 2024
Ans – (a)
Explanation:-
Statement 1 is correct as Money creation by commercial banks raises the National Income.
In the process of money creation, the commercial bank creates money by creating new demand deposits by providing loans to the public.
The loan money is not paid in cash, it is deposited into the new demand deposits
This demand deposit can be used to settle the liabilities and pay for purchases.
The newly created demand deposits work as money. Thus money creation by commercial banks raises the national income.
Statement 2 is also correct, as commercial banks are able to create credit that is in far excess of the initial deposits.
For example:
Initial Deposits = ₹ 1,000
Money multiplier = 4 times
Credit Creation = Initial deposits ×Money Multiplier
Credit Creation = 1,000 × 4
Credit Creation = ₹ 4,000
Anurag Pathak Changed status to publish January 6, 2024
