Question

How is Bank rate altered to correct a depression in an economy? 

How does Bank rate help in controlling the flow of credit in the economy?

How does Bank rate work as a method of credit control? 

Answer 1

The bank rate is the rate at which the central bank lends money to banks.

Bank Rate as a method of Credit Control:

Any change in bank rate affects the lending rates of commercial banks. Consequently, the cost and availability of credit also changes in the market. 

1. A low bank rate (in a situation of deflation) encourages the banks to keep small proportion of their deposits as reserves since borrowing from central bank is now cheaper than before. As a result banks use a greater proportion of their funds for giving out loans to the borrowers. Thus, money supply increases in the economy.
2. The central bank raises the bank rate in a situation of inflation. As a result, cost of credit increases, which in turn discourages the flow of credit. As a result, money supply decreases.