Commercial banks are financial institutions that accept deposits from the public and lend money to individuals, businesses, and governments. One of the unique features of commercial banks is their ability to create money through the process of credit creation.



When a commercial bank receives a deposit, it is required to keep only a fraction of the deposit as a reserve and can lend out the rest. This process is known as fractional reserve banking. When a bank lends money, it creates new deposits, which in turn increases the money supply in the economy.



The impact of money creation by commercial banks on national income can be summarized as follows:

1. Increase in Investment
Money creation by commercial banks can lead to an increase in investment by businesses and individuals. This is because the availability of credit makes it easier for individuals and businesses to finance their investments. Increased investment can lead to an increase in national income.

2. Increase in Consumption
Money creation by commercial banks can also lead to an increase in consumption. This is because increased credit availability can lead to an increase in consumer spending, which can boost economic activity and national income.

3. Increase in Employment
Increased investment and consumption can lead to an increase in employment opportunities. This is because increased economic activity creates jobs, which can lead to an increase in national income.

4. Inflationary Pressures
Money creation by commercial banks can also lead to inflationary pressures in the economy. This is because an increase in the money supply can lead to an increase in demand for goods and services, which can lead to an increase in prices.

5. Economic Instability
Money creation by commercial banks can also lead to economic instability. This is because an increase in credit availability can lead to an increase in speculative activities, which can lead to economic bubbles and subsequent crashes.



In conclusion, money creation by commercial banks can have both positive and negative impacts on national income. While it can lead to an increase in investment, consumption, and employment opportunities, it can also lead to inflationary pressures and economic instability. It is, therefore, important for policymakers to monitor the activities of commercial banks and ensure that they do not create excessive credit.

With money multiplier , commercial banks r able to generate more n more money in d market that helps in increasing d national income of d economy..