"The central bank is the sole supplier of money in an economy".

Which of the following option is true in regards to the above statement? 

The statement is false

The correct answer is Option 2: The statement is false

The central bank is a crucial player in the economy's money supply, but it is not the sole supplier. Commercial banks and government activities also significantly contribute to the overall money supply.

The central bank (e.g., the Reserve Bank of India in India) is responsible for issuing the nation's currency (both coins and paper money). This forms the base money or high-powered money in the economy.

Commercial banks play a significant role in the money supply through the process of credit creation. When banks issue loans, they effectively create money. For instance, when you take a loan from a bank, the bank credits your account with the loan amount, increasing the total money supply in the economy.

Through fiscal policy (taxing and spending), the government can influence the amount of money in circulation. For example, when the government spends on infrastructure projects, it injects money into the economy. Government borrowing can also affect the money supply. When the government borrows from the central bank, it leads to the creation of additional money.