Question

A country is facing economic instability, and the central bank decides to implement strict credit control measures. Which combination of actions is the central bank most likely to take to stabilize the economy?

Options

• Increase the bank rate and sell government securities.

• Decrease the Cash Reserve Ratio (CRR) and lower the bank rate.

• Increase the Statutory Liquidity Ratio (SLR) and buy government securities.

• Lower the reserve requirement and reduce the statutory liquidity ratio.

Answer 1

Increase the bank rate and sell government securities.

Explanation:

To address economic instability, such as high inflation, the central bank employs a contractionary monetary policy, which reduces the money supply. Increasing bank rates raises borrowing costs for commercial banks, resulting in increased retail lending interest rates, while selling government assets absorbs surplus cash liquidity straight from the banking sector, limiting overall credit creation.