BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase in market rates of interest
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A fall in market rates of interest
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A rise only in the deposit rates but not the lending rates.
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A rise only in the base rates
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Detailed explanation-1: -Detailed Solution. The correct answer is Central Bank is following a tight money policy.
Detailed explanation-2: -An increase in this rate means that the Central bank is following a tight monetary policy as increase in rates will lead to decrease in money supply thereby leading to decrease in inflation and reduction in investment.
Detailed explanation-3: -A rise in the bank rate means that the interest charge from commercial banks will increase and it would force commercial banks to increase their interest which will reduce the borrowing by general public and interest rate is high, so the money supply would decrease.
Detailed explanation-4: -By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply.
Detailed explanation-5: -Managing the bank rate is a method by which central banks affect economic activity. Lower bank rates can help to expand the economy by lowering the cost of funds for borrowers, and higher bank rates help to reign in the economy when inflation is higher than desired.