30 Questions
What is the relationship between credit creation and periods of prosperity?
Credit creation is large during periods of prosperity.
Why does the volume of bank credit tend to be high during periods of prosperity?
Increased demand for loans and advances
What is the impact of business depression on the volume of bank credit?
Volume of bank credit decreases
What is one reason for leakages in the process of credit creation mentioned in the text?
People keeping a portion of their amount as idle cash
What is required for a bank to create credit according to the text?
Sound and profitable assets like bills and government securities
How does the power of banks to create credit get affected if people desire to hold more cash?
Decreased power to create credit
What is the primary function of a commercial bank?
Accepting deposits
Which type of deposits are also known as demand deposits?
Current deposits
Who mainly uses current deposits in a commercial bank?
Businessmen and industrialists
Which type of deposit is meant for professional men and middle-class people according to the text?
Savings deposits
What is the restriction on savings deposits regarding withdrawals?
Restriction on the amount that can be withdrawn at a particular time or during a week
What type of deposit does not generally earn interest in a commercial bank?
Current deposit
Why are all bills in hand shown on both sides of the balance sheet?
Because they are considered both an asset and a liability to the bank
Why is bank capital important for protecting depositors?
It determines the bank's ability to cover loans and losses
How do reserve accounts differ from retained earnings?
Retained earnings reduce tax liabilities, while reserve accounts are for covering unanticipated losses
What is the significance of the proportion of capital to deposits for a bank?
Higher capital provides greater protection to depositors
Which type of accounts represent direct investments in a bank?
Capital stock
Why do banks maintain lower capital accounts compared to other businesses?
To reduce their tax liabilities
What is the term used to describe the power of commercial banks to expand deposits through loans, advances, and investments?
Credit creation
How does the cash reserve ratio affect the volume of credit that commercial banks can create?
Decreasing the cash reserve ratio increases credit creation
What role does the banking habit of the people play in credit creation by commercial banks?
Encourages multiple expansions of credit
Which factor mentioned in the text has the power to prescribe and change the cash reserve ratio to be kept by commercial banks?
Central Bank
How does the nature of business conditions in the economy impact credit creation by commercial banks?
Affects the willingness of banks to lend
Why can't all deposits be used for credit creation by commercial banks?
Cash reserve requirements
What is the role of a commercial bank in terms of credit?
Creating credit by accepting deposits and making advances to needy people
How does a commercial bank act as a 'mobiliser of savings'?
By keeping the deposits of households safe and providing loans to businessmen
What is the historical connection between modern banking and the Industrial Revolution?
The Industrial Revolution led to the development of modern banking as a necessity
How do commercial banks contribute to economic activity?
By providing loans to businesses for investment purposes
What distinguishes a commercial bank from other financial institutions?
Accepting deposits from the public and providing credit to individuals and businesses
In what way does a commercial bank act as a 'reservoir' in the economy?
By collecting savings and offering loans for productive purposes
Test your knowledge on credit creation by commercial banks, including the factors that limit their power of credit creation. Explore concepts such as the influence of cash amount and cash reserve ratio on credit creation.
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