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Which of the following is / are not an assumption(s) of credit creation process?
(i) Entire banking system is taken as a single unit.
(ii) All transactions are done through banks.
(iii) There is no saving in the economy.
(i) Entire banking system is taken as a single unit.
(ii) All transactions are done through banks.
(iii) There is no saving in the economy.
- a)Only (i)
- b)Only (ii)
- c)Only (iii)
- d)Both (i) and (ii)
Correct answer is option 'C'. Can you explain this answer?
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Which of the following is / are not an assumption(s) of credit creatio...
Explanation:
The credit creation process refers to the ability of commercial banks to create money through the process of lending. This process is based on certain assumptions that must hold true for credit creation to occur. Let's analyze each assumption mentioned in the given options:
(i) Entire banking system is taken as a single unit:
This assumption implies that all banks in the economy are considered as a single entity when it comes to the creation of credit. In other words, the credit creation process assumes that banks do not compete with each other for deposits or customers. Instead, they work collectively to provide credit to the economy. This assumption is crucial for the credit creation process to function effectively.
(ii) All transactions are done through banks:
This assumption states that all financial transactions in the economy are conducted through banks. It means that individuals and businesses rely on banks for their financial needs, including making payments, receiving salaries, and obtaining loans. This assumption allows banks to have control over the money supply and enables them to create credit through lending.
(iii) There is no saving in the economy:
This assumption states that there are no savings in the economy. It implies that all income earned by individuals and businesses is spent on consumption, and there are no funds kept aside for saving purposes. Without savings, banks would not have the necessary reserves to create credit through lending. Therefore, this assumption contradicts the credit creation process.
Correct answer:
The correct answer is option C (Only (iii)). This is because the assumption that there is no saving in the economy contradicts the credit creation process. The process relies on banks having access to savings in the form of deposits, which they can then use to create credit through lending.
The credit creation process refers to the ability of commercial banks to create money through the process of lending. This process is based on certain assumptions that must hold true for credit creation to occur. Let's analyze each assumption mentioned in the given options:
(i) Entire banking system is taken as a single unit:
This assumption implies that all banks in the economy are considered as a single entity when it comes to the creation of credit. In other words, the credit creation process assumes that banks do not compete with each other for deposits or customers. Instead, they work collectively to provide credit to the economy. This assumption is crucial for the credit creation process to function effectively.
(ii) All transactions are done through banks:
This assumption states that all financial transactions in the economy are conducted through banks. It means that individuals and businesses rely on banks for their financial needs, including making payments, receiving salaries, and obtaining loans. This assumption allows banks to have control over the money supply and enables them to create credit through lending.
(iii) There is no saving in the economy:
This assumption states that there are no savings in the economy. It implies that all income earned by individuals and businesses is spent on consumption, and there are no funds kept aside for saving purposes. Without savings, banks would not have the necessary reserves to create credit through lending. Therefore, this assumption contradicts the credit creation process.
Correct answer:
The correct answer is option C (Only (iii)). This is because the assumption that there is no saving in the economy contradicts the credit creation process. The process relies on banks having access to savings in the form of deposits, which they can then use to create credit through lending.
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Which of the following is / are not an assumption(s) of credit creatio...
There is no such assumption as of not having any savings in the economy in the process credit creation.
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Which of the following is / are not an assumption(s) of credit creation process?(i) Entire banking system is taken as a single unit.(ii) All transactions are done through banks.(iii) There is no saving in the economy.a)Only (i)b)Only (ii)c)Only (iii)d)Both (i) and (ii)Correct answer is option 'C'. Can you explain this answer?
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