How do commercial banks create credit state and explaine the answer
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The money supply of a country consists of notes and coins in circulation and bank deposits. The government itself can create money by issuing more notes and coins through its central bank. However, (commercial) banks can also create money by creating bank deposits. Let us examine how this happens.
The money supply of a country consists of notes and coins in circulation and bank deposits. The government itself can create money by issuing more notes and coins through its central bank. However, (commercial) banks can also create money by creating bank deposits. Let us examine how this happens.The business of banking may be illustrated by assuming a very simple economy having only one bank. Table 41.1 gives the balance sheet of such a bank which has just received a deposit of Rs. 10,000 from a merchant. The two sides of the account show its assets of Rs. 10,000 of cash and coins in the vaults, and liabilities of Rs. 10,000 to the merchant who may, in principle, come at any time to take his money back again.
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