Credit Creation

2691 Words Apr 5th, 2010 11 Pages
SANDHYA DWIVEDI

ROLL NO: 60

SUBJECT: CENTRAL BANKING

CREDIT CREATION
AND
MONEY SUPPLY

PROJECT SUBMITTED TO PROF.RASHMI

CREDIT CREATION

Credit creation is one of the important functions of a commercial bank. It constitutes the major component of money supply in the economy commercial banks differs from other financial institutions in this aspect. Other financial institutions transfer money from the lenders to the borrowers. Commercial banks while performing the same function, they create credit or bank money also. Professor Sayers says, "Banks are not merely purveyors of money, but in an important sense, they are the manufacturers of money".

The process of credit creation occurs when banks accepts deposits and provide loans and
…show more content…
CONCLUSION:-

To conclude, we can say that credit creation by banks is one of the important & only sources to generate income. And when the reserve requirement increased by the central bank it would directly affect on the credit creation by bank because then the lendable funds with the bank decreases and vice versa.

MONEY SUPPLY

The total supply of money in circulation in a given country's economy at a given time. There are several measures for the money supply, such as M1, M2, and M3. The money supply is considered an important instrument for controlling inflation by those economists who say that growth in money supply will only lead to inflation if money demand is stable. In order to control the money supply, regulators have to decide which particular measure of the money supply to target. The broader the targeted measure, the more difficult it will be to control that particular target. However, targeting an unsuitable narrow money supply measure may lead to a situation where the total money supply in the country is not adequately controlled.

In economics, money supply or money stock is the total amount of money available in an economy at a particular point in time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits.

Money supply data are recorded and published, usually by the government or the central bank of the
Open Document