BANKING AFFAIRS

Detailed explanation-1: -Demand deposits are an important constituent of money supply and the expansion of demand deposits means the expansion of money supply. The entire structure of banking is based on credit. Credit basically means getting the purchasing power now and promising to pay at some time in the future.

Detailed explanation-2: -Public expenditures always generate new money through banking reserves. Another main money creation factor is the central bank’s open market operations. In addition, new credit creation expands the money supply by triggering new deposits.

Detailed explanation-3: -Credit creation refers to expanding the availability of money through the advancement of loans and credit by banks and financial institutions. These institutions use their demand deposits to provide loans to their customers, giving borrowers higher purchasing power and competitive interest rates.

Detailed explanation-4: -Credit creation is the expansion of deposits . The bank’s credit creation process is based on the assumption that during any time interval, only a fraction of its customers genuinely need cash. Also, the bank assumes that all its customers would not turn up demanding cash against their deposits at one point in time.

Detailed explanation-5: -Borrowing by the government from the Central Bank will increase the money supply in the economy, because it will be spent by the government on public. Example Direct benefit transfer Subsidies etc. The other two options absorb money from the economy.