Correct Option: C. by receiving deposit from individuals Detailed Explanation: Commercial banks play a crucial role in the money creation process within an economy. The correct answer, option C, highlights one of the primary ways banks can create money: by receiving deposits from individuals. Here’s a step-by-step breakdown of how this process works:

1. Understanding Deposits: When individuals deposit money into their bank accounts, they are essentially providing the bank with funds that the bank can use. This deposit can be in the form of cash or checks.
2. Fractional Reserve Banking: Most commercial banks operate under a system known as fractional reserve banking. This means that banks are required to keep only a fraction of their deposits as reserves (cash on hand or deposits with the central bank) and can lend out the remainder. For example, if the reserve requirement is 10%, and a bank receives a deposit of $1,000, it must keep $100 in reserve and can lend out $900.
3. Money Multiplier Effect: The money that banks lend out can be deposited again by borrowers into either the same bank or another bank, which can then lend out a portion of that deposit as well. This process continues, creating a multiplier effect. The total amount of money created in the economy can be calculated using the money multiplier formula: [ \text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}} ] For a reserve ratio of 10% (0.10), the money multiplier would be: [ \text{Money Multiplier} = \frac{1}{0.10} = 10 ] This means that an initial deposit of $1,000 could ultimately lead to a total money supply increase of $10,000 in the economy.
4. Role of Interest Rates: The ability of banks to create money is also influenced by interest rates. Lower interest rates encourage borrowing, leading to more deposits and, consequently, more money creation.

Why Other Options Are Incorrect:

• Option A: by using coins and paper money This option is incorrect because coins and paper money are physical forms of currency that are issued by the central bank, not created by commercial banks. While banks can handle and distribute these forms of money, they do not create them.
• Option B: by borrowing money from banks abroad While banks can borrow money from foreign banks, this does not constitute money creation. Instead, it is a transfer of existing money. The borrowed funds must be repaid, and this action does not increase the overall money supply in the economy.
• Option D: by printing money on the instruction of the central bank This option is misleading. Only central banks have the authority to print physical currency. Commercial banks do not print money; they create money through lending based on deposits. The central bank controls the money supply and can influence it through monetary policy, but commercial banks do not have the power to print money.

Revision Summary:

• Commercial banks create money primarily by receiving deposits from individuals and lending a portion of those deposits.
• The fractional reserve banking system allows banks to lend out more money than they hold in reserves, leading to the money multiplier effect.
• Only central banks can issue physical currency; commercial banks do not print money.
• Borrowing from foreign banks does not create new money; it is merely a transfer of existing funds.