WAEC SSCE - Economics - 2008 (Objective)

Question 1 Report

Creation of money by commercial bank is done by

increasing the cash ratio

printing money

lending to borrowers

issuing cheques

Answer Details

Commercial banks can create money by lending to borrowers. When a bank receives a deposit from a customer, it is required to hold only a fraction of that deposit as cash reserves, known as the reserve ratio. The remaining portion can be lent out to borrowers as loans. When a loan is made, the bank credits the borrower's account with the loan amount, creating new money in the process. This new money is then spent or deposited in other banks, and the process can repeat, further increasing the money supply in the economy. Therefore, the act of lending to borrowers is how commercial banks create money.






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