“An increase in the credit creation capacity of commercial banks has a direct impact on the money supply in an economy.”

Discuss the given statement.

Commercial banks perform the function of credit creation. The amount of credit creation depends upon initial deposits and reserve ratio. With the decrease in the reserve ratio by the Central Bank, the lending capacity of the commercial banks increases. With the increase in the amount of credit creation, money in circulation increases multiple times, thereby increasing the money supply.Hence, an increase in credit creation capacity of commercial banks has a direct impact on the money supply in an economy.