ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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commercial bank assets are increased.
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money is destroyed.
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commercial bank assets are decreased.
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money is created.
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Detailed explanation-1: -Because the money supply in the hands of the public is made up of bank-created numbers in people’s bank accounts, repaying loans in this way actually reduces the amount of money in the economy. Money – the type of money that the public use – has been destroyed in the act of repaying the loan.
Detailed explanation-2: -And just as money is created when banks issue loans, it is destroyed as the loans are repaid. A loan payment reduces checkable deposits; it thus reduces the money supply.
Detailed explanation-3: -Therefore, when the loans are paid off, the amount is reduced in the commercial bank and thus, causing a decline in the money supply. Thus, it can be said that when a commercial bank makes a loan, then it leads to more creation of money. And, when loans are repaid, then the money is destroyed.
Detailed explanation-4: -“When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” Explain. The loans increase the checkable deposits and create money, whereas paying off the loans reverses the cycle and destroys the money.
Detailed explanation-5: -The assets are items that the bank owns. This includes loans, securities, and reserves. Liabilities are items that the bank owes to someone else, including deposits and bank borrowing from other institutions.