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Question

Difficulty: MediumCommercial Banks: Functions and Credit Creation

Match each commercial banking function or credit creation concept with its corresponding description or formula.

  • Credit MultiplierThe reciprocal of the cash reserve ratio (1/CRR1 / \text{CRR}) indicating potential deposit expansion
  • Primary FunctionAccepting demand deposits and granting loans or advances to borrowers
  • Cash Reserve RatioThe legally mandated fraction of total deposits that commercial banks must hold in reserve
  • Agency ServiceExecuting standing orders and collecting dividends on behalf of customers

Answer

Credit Multiplier matches with 'The reciprocal of the cash reserve ratio (1/CRR1 / \text{CRR}) indicating potential deposit expansion'; Primary Function matches with 'Accepting demand deposits and granting loans or advances to borrowers'; Cash Reserve Ratio matches with 'The legally mandated fraction of total deposits that commercial banks must hold in reserve'; Agency Service matches with 'Executing standing orders and collecting dividends on behalf of customers'.
Credit Multiplier is the reciprocal of the cash reserve ratio (1/CRR1 / \text{CRR}). Primary functions of commercial banks include accepting deposits and advancing loans. The Cash Reserve Ratio is the required proportion of total deposits held as cash or reserves. Agency services involve representative tasks executed for account holders, such as paying standing orders or collecting dividends.

Step-by-Step Solution

1
Define the mathematical concept of credit expansion
Credit Multiplier equals 1/CRR1 / \text{CRR}, which determines how much total credit can be created from an initial deposit.
This establishes the quantitative relationship in money creation.
2
Classify core banking operations
Accepting deposits and lending constitute primary functions.
Primary functions define the foundational business model of commercial banks.
3
Identify regulatory reserve constraints
Cash Reserve Ratio is the required statutory reserve percentage.
It sets the legal limit on banks' ability to create credit.
4
Categorize secondary client services
Collecting dividends and processing standing orders are agency services.
These are representative services performed by the bank on behalf of account holders.

Key Concept

Commercial Bank Functions and Credit Creation
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Topics

Commercial Banks: Functions and Credit Creation