Question

    When a commercial bank creates credit, its immediate

    effect is that it raises
    A The money supplies Correct Answer Incorrect Answer
    B The exchange rates Correct Answer Incorrect Answer
    C The real national income Correct Answer Incorrect Answer
    D The interest rate Correct Answer Incorrect Answer
    E The stock market index Correct Answer Incorrect Answer

    Solution

    Extending credit or creating credit refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends ₹ 5 lakh to an individual and opens a demand deposit in the name of that individual. Bank makes a credit entry of ₹5 lakh in that account. This leads to creation of demand deposits in that account. The point to be noted here is that there is no payment in cash. Thus, without printing additional money, the supply of money is increased.

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