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      Question

      Commercial banks create money in the following

      ways:
      A Issuing currency Correct Answer Incorrect Answer
      B Creation of bank deposits Correct Answer Incorrect Answer
      C Payments Correct Answer Incorrect Answer
      D Neither (1) nor (2) Correct Answer Incorrect Answer
      E Both (1) and (2) Correct Answer Incorrect Answer

      Solution

      Loans are made by commercial banks using bank deposits received from depositors. When a bank makes a loan, it does not make a cash payment. A demand deposit account is opened in the borrower’s name, and the loan proceeds are placed there. The borrower may pay from these demand deposits through a cheque, ATM, or internet banking.

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