Question : What will be the impact on the credit creation ability of commercial banks if the government reduces income tax slabs?
Option 1: There will be more credit creation in the economy.
Option 2: There will be less credit creation in the economy.
Option 3: There will be no impact on credit creation.
Option 4: It depends upon the behaviour of the targeted population.
Correct Answer: There will be more credit creation in the economy.
Solution : The correct answer is (a) There will be more credit creation in the economy.
When the government reduces income tax slabs, individuals have more disposable income available. This increased disposable income can lead to higher spending and consumption in the economy. When individuals spend more, it can create a higher demand for goods and services. To meet this increased demand, businesses may seek additional financing from commercial banks to expand their operations, invest in new projects, or meet the increased working capital requirements.
Commercial banks, in response to the increased demand for loans, can expand their credit creation activities by providing loans and credit to businesses and individuals. This can stimulate economic growth and contribute to more credit creation in the economy.
Therefore, reducing income tax slabs can generally lead to more credit creation in the economy as it boosts consumer spending and business investment, leading to increased loan demand from commercial banks.
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