What is the immediate outcome on the economy when a commercial bank generates credit__________________?
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Answer: C. The money supplies
Explanation
When commercial banks extend credit and create customer deposits, the immediate result is an expansion of the money supply. Bank lending injects new purchasing power directly into the financial system. This credit creation process is a core function of modern fractional-reserve banking. Commercial banks hold only a fraction of deposits in reserve and lend out the rest. The money multiplier determines the total increase in money supply resulting from initial bank deposits. Credit creation enables businesses and consumers to finance investments and major purchases.
Central banks regulate commercial bank lending to control inflation and stabilize the economy. Excessive credit expansion can lead to asset bubbles and severe inflationary pressures. Access to bank credit is vital for fostering entrepreneurial activity and economic growth. Exchange rates are influenced by international trade and interest rate differentials rather than immediate credit creation. Interest rates respond to overall credit demand and monetary policy rather than being the direct credit output. Real national income grows over time, but the immediate accounting outcome is a larger money supply.
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