Q.Explain the main functions of the central bank. How do its credit-control functions affect business firms?

Credit (deposit) creation is the function of commercial banks, which lend a multiple of their reserves. Answer: (c) Commercial Bank.

Credit creation means the ability of the banking system to expand the total volume of deposits (and hence the money supply) to a multiple of the cash reserves it holds. It works like this: a commercial bank keeps only a fraction of each deposit as cash reserve (the cash reserve ratio) and lends out the rest; the borrowed money is spent and redeposited in the banking system, part of which is again lent out, and so on. Through this process deposits expand to a multiple of the original cash — this is credit creation.

• Commercial banks carry out credit creation as a normal part of accepting deposits and advancing loans. …

The statement is correct — cash in hand is the most liquid of all the assets of a commercial bank.

Liquidity refers to how quickly and cheaply an asset can be converted into cash. A commercial bank holds a range of assets that differ in liquidity — cash in hand, balances with the central bank, money at call and short notice, bills discounted, investments in securities, and loans and advances. These are usually arranged in order of declining liquidity.

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The statement is incorrect; the RBI was established in 1935, not 1955. Correct statement: 'Reserve Bank of India was established in the year 1935.'

The Reserve Bank of India (RBI) is the central bank of the country. It was set up under the Reserve Bank of India Act, 1934, and commenced operations on 1 April 1935. It was originally a shareholders' bank and was later nationalised on 1 January 1949, after which it became fully owned by the Government of India.

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The correct answer is (b) Measure of value.

This tests the functions of money in CHSE Odisha +2 Business Economics.

Money performs four main functions:

• Medium of exchange (a) — it is accepted in buying and selling, removing the need for barter.
• Measure of value (b) — it provides a common unit in which the value of all goods and services is expressed and compared; this is precisely what makes money the unit of account.
• Standard of deferred payment (c) — it allows contracts and debts to be settled in future. …

The correct answer is (c) Issue of notes.

This distinguishes central-bank from commercial-bank functions in CHSE Odisha +2 Business Economics.

• Acceptance of deposits (a), advancing loans (b) and credit creation (d) are the ordinary functions of commercial banks, which deal directly with the public.
• Issue of notes (c) is the exclusive privilege of the central bank (in India, the Reserve Bank of India). It has the sole monopoly of currency issue, which brings uniformity, control and public confidence to the note circulation. …