All Courses
Explore Courses UPSC Exam UPSC Test Series Free Notes EduRev Infinity Get the App Login Join for Free
Sign in Open App
Commerce Exam  >  Commerce Questions  >  Commercial bank create money in the economy.c... Start Learning for Free
SaveJoin the Discussion on the App
Commercial bank create money in the economy.comment?
Clear all your Commerce doubts with EduRev
Most Upvoted Answer
Commercial bank create money in the economy.comment?
Commercial Banks and Money Creation in the Economy


Commercial banks play a critical role in the economy by creating money through the process of credit creation. When a commercial bank lends money to a borrower, it creates new money in the economy. This process of money creation by commercial banks is often referred to as the multiplier effect, as the initial deposit can generate multiple loans and deposits in the economy.


The Process of Money Creation by Commercial Banks


The process of money creation by commercial banks involves the following steps:



  • A customer deposits money into a bank account.

  • The bank holds a fraction of the deposit as reserves and lends out the rest to borrowers.

  • The borrower spends the money, and the recipient of the spending deposits the money into their bank account.

  • The bank holds a fraction of the new deposit as reserves and lends out the rest to other borrowers.

  • This process repeats, and the initial deposit has now generated multiple loans and deposits in the economy.



The Role of the Reserve Requirement


The reserve requirement is the percentage of deposits that banks must hold in reserve. The reserve requirement acts as a constraint on the amount of money that banks can create through loans. If the reserve requirement is 10%, then a bank can lend out 90% of its deposits. However, if the reserve requirement is increased to 20%, then the bank can only lend out 80% of its deposits. Therefore, the reserve requirement can impact the amount of money that banks can create in the economy.


The Impact of Money Creation by Commercial Banks


The impact of money creation by commercial banks can be significant. The increase in the money supply can lead to an increase in aggregate demand, which can lead to inflation. However, if the increase in the money supply is used to finance productive investments, it can lead to economic growth and increased employment.


Conclusion


Commercial banks play a critical role in the economy by creating money through the process of credit creation. The process of money creation involves the deposit of money into bank accounts, and the lending out of a fraction of the deposit to borrowers. The reserve requirement acts as a constraint on the amount of money that banks can create through loans. The impact of money creation by commercial banks can be significant and can lead to economic growth or inflation depending on how the money is used.
Community Answer
Commercial bank create money in the economy.comment?
Most of the money in the economy is created by banks,in the form of bank deposits, the number that appears in your account,banks creates new money whenever they makes loans.97% of the money is created by the banks,whilist just 3% is created by the government.
Attention Commerce Students!
To make sure you are not studying endlessly, EduRev has designed Commerce study material, with Structured Courses, Videos, & Test Series. Plus get personalized analysis, doubt solving and improvement plans to achieve a great score in Commerce.
Explore Courses for Commerce exam

Similar Commerce Doubts

Read the following case study paragraph carefully and answer the question based on the same.The central bank of India i.e. Reserve Bank of India is the apex institution that controls the entire financial market. It’s one of the major functions is to maintain the reserve of foreign exchange. Also, it intervenes in the foreign exchange market to stabilize the excessive fluctuation in the foreign exchange rate.In other words, it is the central bank’s job to control a country’s economy through monetary policy; if the economy is moving slowly or going backward, there are steps that the central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all involve injecting more cash into the economy. The simple supply and demand economic projection occurs and currency will devalue.When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank does or doesn’t do, will affect the currency of that country. Sometimes, it is within the central bank’s interest to purposefully affect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country’s commodities will seek cheaper supply; hence directly affecting the economy.Q. Dear money policy of the central bank, which is used to keep the growth steady and in-line with other economic factors, refers to

Top Courses for CommerceView all

Top Courses for Commerce

Commercial bank create money in the economy.comment?
Question Description
Commercial bank create money in the economy.comment? for Commerce 2025 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Commercial bank create money in the economy.comment? covers all topics & solutions for Commerce 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Commercial bank create money in the economy.comment?.
Solutions for Commercial bank create money in the economy.comment? in English & in Hindi are available as part of our courses for Commerce. Download more important topics, notes, lectures and mock test series for Commerce Exam by signing up for free.
Here you can find the meaning of Commercial bank create money in the economy.comment? defined & explained in the simplest way possible. Besides giving the explanation of Commercial bank create money in the economy.comment?, a detailed solution for Commercial bank create money in the economy.comment? has been provided alongside types of Commercial bank create money in the economy.comment? theory, EduRev gives you an ample number of questions to practice Commercial bank create money in the economy.comment? tests, examples and also practice Commerce tests.
Explore Courses for Commerce exam

Top Courses for Commerce

Explore Courses

Suggested Free Tests

Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
10M+ students study on EduRev
Get App
© EduRev
Education Revolution
Signup to see your scores go up within 7 days!
Access 1000+ FREE Docs, Videos and Tests
Takes less than 10 seconds to signup