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Question
State whether the following statement is True or False.
Credit money is created by the central bank of a country.
Options
True
False
Solution
Credit money is created by the central bank of a country. – False
Explanation: The above statement is false. Credit is created by the commercial banks of a country. People deposit their money with the commercial banks. A portion of these deposits (after keeping the reserves) is then further lent out to the general public as loans. The money spent by the borrowers again come back to the bank in the form of deposits (if it is assumed that all transactions are routed through banks). The banks again keep a portion of the deposits with them and lent the rest and so on. In this way the commercial banks create credit. Note that as central bank does not accepts deposits and lends to the general public, it cannot create credit.
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