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Currency is issued by the central bank, yet we say that commercial banks create money. Explain. How is this money creation by commercial banks likely to affect the national income? Explain |
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Answer» Solution :Money SUPPLY has two components: Currency with public and demand deposits with commercial banks. Currency is ISSUED by the central bank while deposits are created by commercial banks by lending money to the people. In this WAY commercial banks also create money. Commercial banks lend money mainly to investors. The rise in investment in the ECONOMY leads to rise in national income through the multiplier EFFECT. |
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