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State three limitations on the power of banks to create credit - Leaving Cert Economics - Question 4 - 2017
Question 4
State three limitations on the power of banks to create credit. (i) ____________________________________________________ (ii) _____________________________________... show full transcript
Worked Solution & Example Answer:State three limitations on the power of banks to create credit - Leaving Cert Economics - Question 4 - 2017
Step 1
(i) Limited availability of suitable borrowers
Answer
Banks face limitations in credit creation due to the scarcity of suitable borrowers. When there are not enough individuals or entities that meet the lending criteria, banks cannot issue loans, which subsequently reduces their ability to create credit.
Step 2
(ii) Limited ability to attract cash deposits
Answer
The capability of banks to create credit is also constrained by their ability to attract cash deposits. If customers are not willing to deposit funds, the banks will have less base capital to lend, thereby limiting their credit creation potential.
Step 3
(iii) Lack of demand for loans/credit by customers
Answer
Even when banks are willing to lend, a lack of demand for loans from customers can restrict the banks' ability to create credit. If consumers or businesses are not seeking credit due to economic uncertainty or other factors, banks will not be able to extend loans, limiting their credit creation capacity.