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Question
What do you mean by credit creation by commercial banks?
Options
It is the process of total withdrawal creation
It is the process of loan creation
It is the process of total deposit creation
It is the process of creation of foreign exchange
MCQ
Solution
It is the process of total deposit creation.
Explanation:-
It is done through the Legal reserve ratio. Commercial banks create money by way of demand deposits. They do it by advancing loans many times more than their cash reserves. they do it on the basis of their historical experience that the deposit holders never turn up en mass to withdraw their deposits. That, the liability towards the deposit holders can be managed by keeping only a small percentage of deposits as cash reserves.
shaalaa.com
Money Creation Or Credit Creation by the Commercial Banking System
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