Question

How do commercial banks contribute to money supply in the economy? Explain.

Answer 1

Dear student
Commercial bank mainly performs two functions which contribute to the money supply in the economy:
1. Accepting deposits: Bank accepts money from the general public in the form of deposits. These deposits can be chequeable or non-chequeable e.g. saving account deposits, current account, and fixed deposits.
2. Providing loans Commercial bank provides money to the people in the form of loans and advances to fulfil the needs of money. Loan may be in the form of cash, short-term loan, overdraft, discounting of bills, consumer credit, etc.

This way the supply of money is maintained in the economy.

Thanks.