One Critical Function Of Commercial Banks Is Credit Creation. Discuss The Function Using A Two Bank Economy?


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Yes you are right that the major function of commercial bank is credit creation and it is the multiple expansions of banks demand deposits. This cannot happen in the single bank economy and it is applicable only in the two bank economy. One bank opens a deposit account in the name of the debtor and allows him to draw when required. Through this process the loan advanced becomes the gain of deposit by some other bank. In this way loans become the deposits and the deposits appear as loans.
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