Question

Which statement best explains why the central bank should control both currency and credit?

Options

• Because it prepares the Union Budget

• Because commercial banks cannot keep reserves

• Because cash reserves form the basis of credit creation

• Because it controls only foreign exchange

Answer 1

Because cash reserves form the basis of credit creation

Explanation: 

Cash reserves in the form of currency are the foundation of credit creation by commercial banks, so the authority that controls currency must also control credit.