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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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