Question : What will be the impact on the credit creation ability of commercial banks if the government reduces income tax slabs?
Option 1: There will be more credit creation in the economy.
Option 2: There will be less credit creation in the economy.
Option 3: There will be no impact on credit creation.
Option 4: It depends upon the behaviour of the targeted population.
Correct Answer: There will be more credit creation in the economy.
Solution : The correct answer is (a) There will be more credit creation in the economy.
When the government reduces income tax slabs, individuals have more disposable income available. This increased disposable income can lead to higher spending and consumption in the economy. When individuals spend more, it can create a higher demand for goods and services. To meet this increased demand, businesses may seek additional financing from commercial banks to expand their operations, invest in new projects, or meet the increased working capital requirements.
Commercial banks, in response to the increased demand for loans, can expand their credit creation activities by providing loans and credit to businesses and individuals. This can stimulate economic growth and contribute to more credit creation in the economy.
Therefore, reducing income tax slabs can generally lead to more credit creation in the economy as it boosts consumer spending and business investment, leading to increased loan demand from commercial banks.
Question : If the Reserve Bank of India reduces the cash reserve ratio(CRR), what will be its effect on credit creation?
Option 1: Increase in the credit
Option 2: Decrease credit creation
Option 3: Have no impact on credit creation
Option 4: Have no definite impact on credit creation
Question : The process of creating credit money by commercial banks is known as ___________.
Option 1: Credit creation
Option 2: Credit control
Option 3: Credit extension
Option 4: Credit allocation
Question : The bank rate is the rate at which:
Option 1: RBI borrows from commercial banks
Option 2: RBI lends to commercial banks
Option 3: Commercial banks lend to customers
Option 4: Commercial banks borrow from RBI
Question : Which type of tax acts as an automatic stabiliser in the economy?
Option 1: Professional tax
Option 2: Wealth tax
Option 3: Capital gains tax
Option 4: Proportional income tax
Question : Which of the following is not a primary function of commercial banks?
Option 1: Transfer of funds
Option 2: Creation of credit
Option 3: Lending loans to the public
Option 4: Receiving deposits from the public
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