Question

When considering the functions of commercial banks, which statement(s) is (are) correct?

1. Commercial banks provide loans and advances to individuals and businesses.
2. Commercial banks are solely responsible for issuing currency.
3. Commercial banks have no involvement in government transactions.
4. Commercial banks play a crucial role in the money creation process through lending.

Options

• 1. & 3.

• 2. & 4.

• Only 1.

• 1. & 4.

Answer 1

1. & 4.

Explanation:

Statement 1 is correct because providing retail loans and advances to individuals and businesses is a fundamental purpose of commercial banks. Statement 4 is also correct since commercial banks dynamically increase the money supply through credit creation by lending out a large amount of their public deposits. The remaining statements are absolutely incorrect because the central bank has the unique monopoly on note and currency issuance, and commercial banks actively participate in government transactions by assisting with tax collection and purchasing government securities.