Credit Creation by Commercial Banks Quiz

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30 Questions

What is the primary requirement if a customer wishes to withdraw more than the specified amount at any one time?

Give prior notice

What is the rate of interest like on a credit balance compared to a fixed deposit?

Less than that on fixed deposit

What is the other name for Fixed Deposits as mentioned in the text?

Time deposits

What is the condition for withdrawal of Fixed Deposits before the expiry of the period?

Cannot be withdrawn before the expiry of the period

In what range of time periods are Fixed Deposits typically accepted in India?

Between three months and ten years

What is the most common way of lending by commercial banks as mentioned in the text?

Overdraft Facilities

What is credit creation in banking?

The expansion of bank deposits through the process of more loans and advances and investments.

How can bank deposits be categorized according to the text?

Primary deposits and Derivative deposits.

What are primary deposits also known as?

Cash deposits.

What is the role of the bank in primary deposits?

Passive.

How are derivative deposits created according to the text?

When a loan is granted, a bill is discounted, or government securities are purchased.

What is the basis of credit money in banking?

Bank deposits.

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 amount of cash received by banks affect their power to create credit?

More cash allows for more credit creation, while less cash limits credit creation.

Explain the impact of the cash reserve ratio on the volume of credit that banks can create.

Increasing the cash reserve ratio decreases the volume of credit creation, while decreasing it increases credit creation.

What role do the banking habits of the people play in the process of credit creation?

The banking habits must involve customers redepositing their loans back into the bank for multiple expansions to occur.

Explain how the nature of business conditions in the economy influences credit creation.

Credit creation is dependent on the prevailing business conditions in the economy.

Who has the authority to prescribe and change the cash reserve ratio to be kept by commercial banks?

The Central Bank

What happens to credit creation during a period of prosperity?

It will be large.

How does the volume of bank credit change during business depression?

It will be low.

What can reduce the power of banks to create credit according to the text?

Liquidity preference.

What assets are required for a bank to create credit according to the text?

Sound and profitable assets like bills and government securities.

What can influence the volume of credit created by banks, according to the text?

Monetary policy of the Central Bank.

How can leakages affect the process of credit creation?

Leakages may disrupt the smooth flow of funds from one bank to another.

What are the three most important guiding principles of asset distribution in a bank?

Liquidity, profitability, safety or security

What is considered the first line of defense to the bank in terms of assets?

Cash on hand

What does 'Money at Call and Short Notice' in a bank's assets include?

Loans to brokers, dealers, and other banks

How are the various items on the assets side of a bank distributed?

Descending order of liquidity, ascending order of profitability

What does the second line of defense to a bank refer to?

Money with central bank or other commercial banks

Why is cash on hand considered the first line of defense to a bank?

It can be immediately used to meet depositors' obligations

Test your knowledge about the concept of credit creation by commercial banks and the limitations they face. Learn about factors that affect the power of commercial banks to create credit, such as cash reserves and cash received.

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