Discussion
Which of the following limits the power of credit creation by Commercial Bank
Answer: D
Correct answer: None of the above
None of the three named items limits credit creation. Fiscal policy concerns government taxation and expenditure and operates on aggregate demand, not on a bank's ability to create deposits. "Banking loan" and "business possession" are not recognised instruments at all.
What actually constrains credit creation is the cash reserve ratio and the statutory liquidity ratio, which lock up part of every deposit, together with the public's preference for holding cash, the availability of creditworthy borrowers, and the bank's own capital adequacy - all monetary and prudential rather than fiscal.
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