Question

With the help of cash reserve deposited by commercial banks with Central bank commercial banks can _______________.

• A. Increase their credit in the market
• B. A cash reserve ratio can be formed
• C. Both a & b
• D. None of the above

Answer 1

The correct option is C Both a & b

The commercial banks have to maintain a proportion of their total deposits as reserves in the form of cash with the central bank as a part of legal requirement. With the help of these cash reserve deposited with the central bank, the commercial banks can increase their credit in the market by using these deposits to create credit in the economy. They can even form a cash reserve ratio which will be the proportion of their total deposits that they have to maintain with the central bank as reserves in the form of cash.