Question

Loans offered by commercial banks are

• A. Less than the deposits received by them
• B. More than the deposits received by them
• C. Equal to the deposits received by them
• D. None of these

Hint:

Through fractional reserve banking, commercial banks lend more money than the deposits they receive, increasing the money supply in the economy.

Answer 1

The Correct Option is B

Step 1: Understanding Bank Loans and Deposits:
Commercial banks provide loans to customers in the form of credit. The amount of loans given by banks is typically higher than the amount of deposits they receive, thanks to the process of money creation through fractional reserve banking. Banks only keep a fraction of deposits as reserves and lend out the rest.
Step 2: The Process of Money Creation:
When a commercial bank receives a deposit, it is required to keep a certain percentage as reserves (as per the reserve requirements set by the central bank) and lend out the remaining portion. This lending process increases the total money supply in the economy. Therefore, banks are able to lend more than the total deposits they receive.
Step 3: Analyzing the Options:
- Option (A) Less than the deposits received by them: This is incorrect. Banks lend more than they receive in deposits through the money creation process.
- Option (B) More than the deposits received by them: This is the correct answer. Through fractional reserve banking, banks lend more than the deposits they receive.
- Option (C) Equal to the deposits received by them: This is incorrect because banks lend a portion of deposits, not the entire amount.
- Option (D) None of these: This is incorrect since option (B) is the correct answer.
Step 4: Conclusion and Answer:
The correct answer is (B) because commercial banks lend more than the deposits they receive through the fractional reserve banking system.