Commercial Applications
When considering the functions of commercial banks, which statement(s) is (are) correct?
(1) Commercial banks provide loans and advances to individuals and businesses.
(2) Commercial banks are solely responsible for issuing currency.
(3) Commercial banks have no involvement in government transactions.
(4) Commercial banks play a crucial role in the money creation process through lending.
- 1 & 3
- 2 & 4
- Only 1
- 1 & 4
Answer
1 & 4
Reason — Statement 1 is CORRECT — providing loans and advances (overdrafts, cash credit, discounting of bills, loans) is one of the primary functions of commercial banks. Statement 4 is CORRECT — commercial banks create credit through their lending activities. Statement 2 is INCORRECT — only the central bank issues currency notes. Statement 3 is INCORRECT — commercial banks do undertake government-related work such as collection and payment of taxes and handling of government accounts.
Related Questions
An open cheque is safer than a crossed cheque because it can be cashed by anyone.
- True
- False
A country is facing economic instability, and the central bank decides to implement strict credit control measures. Which combination of actions is the central bank most likely to take to stabilize the economy?
- Increase the bank rate and sell government securities.
- Decrease the Cash Reserve Ratio (CRR) and lower the bank rate.
- Increase the Statutory Liquidity Ratio (SLR) and buy government securities.
- Lower the reserve requirement and reduce the statutory liquidity ratio.
Assertion (A): One of the primary functions of a central bank is to act as the lender of last resort.
Reason (R): Central banks can influence interest rates through their monetary policy decisions, which include changes in the policy rate or reserve requirements.
- A is true but R is false
- A is false but R is true
- Both A and R are true and R explains A
- Both A and R are true but R does not explain A
Central bank regulates credit through
- Open market operations
- Bank rate
- Reserve requirements
- All of these