Free help with homework

Why join Brainly?

  • ask questions about your assignment
  • get answers with explanations
  • find similar questions

Currency is issued by central bank, yet we say commercial banks create money. Explain. How is this money creation by commercial banks likely to affect the

national income? Explain.


Currency which is issued by the central bank of a country is "Legal Tender" money which means that an individual cannot refuse that money as a medium of exchange since it has the backing of the Government.

Credit which is created by the commercial banks is out of the 'deposits' which people make with these banks.When people deposit their money in the commercial banks,after keeping an amount aside as security,according to the legal reserve ratio,banks lend out the remaining amount to the people as loans.Banks do so by opening a current account in the name of the borrower.Thus, this way,commercial banks create credit in the economy.

People taking such loans from the banks are generally producers(businessmen) they employ this credit obtained on productive purposes and hence gives rise to expenditure on capital goods by them and also to compensation of employees etc.This affects the national income.

Hope,I made it clear to you. :)
0 0 0
The Brain
  • The Brain
  • Helper
Not sure about the answer?
Learn more with Brainly!
Having trouble with your homework?
Get free help!
  • 80% of questions are answered in under 10 minutes
  • Answers come with explanations, so that you can learn
  • Answer quality is ensured by our experts