Final answer:
The correct answer to the question is that commercial banks in Canada are prohibited by law from B) Issuing paper currency. Commercial banks in Canada are allowed to accept demand and term deposits, lend money, and settle inter-bank debts, but they are legally prohibited from issuing paper currency, which is a function reserved for the Bank of Canada.
Step-by-step explanation:
Commercial banks in Canada are highly regulated institutions, with various laws and regulations in place to ensure the stability and solvency of the financial system. In terms of the options provided, commercial banks in Canada are certainly allowed to accept both demand and term deposits, which are essential services that banks provide. Banks are indeed allowed to lend money to households and firms as well, which is one of their primary functions. They also play a key role in settling inter-bank debts through a clearinghouse. However, the issuance of paper currency is typically a function reserved for the central bank of a country. In Canada, the Bank of Canada holds the exclusive right to issue paper currency, meaning commercial banks are not allowed to do so.
Therefore, the correct answer to the question is that commercial banks in Canada are prohibited by law from B) Issuing paper currency.