Q.What is meant by credit creation? Explain the process by which commercial banks create credit.

The current account possesses the most liquidity — option (c) — because funds can be withdrawn on demand any number of times without restriction.

Commercial banks offer several deposit accounts:

• Current account — meant for businesspersons; money can be deposited and withdrawn any number of times on demand, so it is the most liquid, but usually earns no interest.
• Saving account — has some limits on withdrawals; moderately liquid with small interest. …

Total credit creation = Primary deposit × 1/CRR (credit multiplier = 1 ÷ Cash Reserve Ratio).

Commercial banks keep only a fraction of every deposit as reserves (the Cash Reserve Ratio, CRR) and lend out the rest, which returns to the banking system as fresh deposits, and the process repeats. The total credit the banking system can create from an initial deposit is given by the formula:

$\text{Total credit} = \text{Primary deposit} \times \frac{1}{\text{CRR}}$

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The first real bank in the world was set up in Spain — option (d).

The history of banking in the GSEB Class-12 course notes that organised public banking began in early European city-states. The first real bank is credited to Spain, the Bank of Barcelona being an early and widely cited public bank that accepted depos …