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State Whether the Following Statement is True Or False. Credit Money is Created by the Central Bank of a Country. - Economics

MCQ
True or False

State whether the following statement is True or False.

Credit money is created by the central bank of a country. 

Options

  • True

  • False

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Solution

Credit money is created by the central bank of a country. – False
Explanation: The above statement is false. Credit is created by the commercial banks of a country. People deposit their money with the commercial banks. A portion of these deposits (after keeping the reserves) is then further lent out to the general public as loans. The money spent  by the borrowers again come back to the bank in the form of deposits (if it is assumed that all transactions are routed through banks). The banks again keep a portion of the deposits with them and lent the rest and so on. In this way the commercial banks create credit. Note that as central bank does not accepts deposits and lends to the general public, it cannot create credit.

Concept: Commercial Banks
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APPEARS IN

Micheal Vaz Economics HSC 12th Standard Maharashtra State Board
Chapter 12 Commercial Banking
Exercise | Q 3.3 | Page 110
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