Question

Consider the following statements:
1. Whenever a bank grants a loan, it creates a deposit or a liability against itself.
2. Deposits of the bank circulate as money, the creation of such deposits lead to a net increase in the money stock.
3. Whenever a bank grants a loan, it creates a loan.
Which of the statement(s) given above is/ are correct?

• A. $1$ only
• B. $2$ and $3$
• C. $3$ only
• D. $1$ and $2$

Answer 1

Answer: (D)

$1$ and $2$

Banks accept cash in demand deposits and advance loans on credit to customers. When a bank advances a loan, it does not pay the amount in cash. But it opens a current account in his name and allows him to withdraw the required sum by cheques. In this way, the bank creates credit or deposits. In granting loan, a bank actively creates a claim against itself and in favour of borrower. The claims the bank takes from its customers, in exchange for the deposits entered in the books are the bank's assets.