ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -(ii) A decrease in the bank rate will reduce the cost of borrowings of commercial banks from the Central Bank. The commercial banks will further reduce their lending rates increasing the volume of credit and money supply in the economy.

Detailed explanation-2: -If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.

Detailed explanation-3: -Central banks conduct monetary policy by adjusting the supply of money, usually through buying or selling securities in the open market. Open market operations affect short-term interest rates, which in turn influence longer-term rates and economic activity.

Detailed explanation-4: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.

Detailed explanation-5: -Increasing the OCR increases interest rates and helps bring inflation down. On 22 February 2023, we increased the OCR from 4.25% to 4.75%.