Question : The process of creating credit money by commercial banks is known as ___________.
Option 1: Credit creation
Option 2: Credit control
Option 3: Credit extension
Option 4: Credit allocation
Correct Answer: Credit creation
Solution : The correct answer is (a) Credit creation.
The process of creating credit money by commercial banks is known as credit creation. Commercial banks have the ability to create credit by extending loans and making advances to borrowers. When a bank grants a loan, it creates a deposit in the borrower's account, effectively increasing the money supply in the economy. This process is based on the fractional reserve banking system, where banks are required to hold only a fraction of the deposits they receive as reserves, allowing them to lend out the rest. Through this process of credit creation, banks contribute to the expansion of the money supply and facilitate economic activities. Credit control, credit extension, and credit allocation are related terms but do not specifically refer to the process of creating credit money by commercial banks.
