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Question
During deflation, the Central Bank usually ______.
Options
Increases CRR
Increases SLR
Increases bank rate
Increases buying Government Securities
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Solution
During deflation, the Central Bank usually increases buying Government Securities.
Explanation:
During deflation, the central bank works to raise the money supply in the economy, hence increasing the demand for products. This is only conceivable if Increases buying Government Securities is chosen, which involves increasing the money supply by purchasing government assets on the market.
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RELATED QUESTIONS
Briefly explain two qualitative methods of credit control adopted by this institution.
The rate of which commercial banks borrow from the Central Bank is the:
In order to encourage investment in the economy, the central bank may ______.
Match the following and select the correct option:
| Column A | Column B | ||
| (i) | A rate of interest at which the central bank (RBI) lends money to member commercial banks to meet they long term needs. | A. | Cash Reserve Ratio |
| (ii) | A rate of interest at which RBI lends money to commercial banks to meet their short term needs. | B. | Statutory liquidity ratio |
| (iii) | A minimum percentage of total deposits kept by banks with the Central Bank. | C. | Repo rate |
| (iv) | A minimum percentage of total deposits to be kept by banks inform of liquid assets with themselves. | D. | Bank rate |
Observe the relationship of the first pair of words and complete the second pair.
Quantitative method of credit control by the central bank : Bank rate.
Quantitative method of credit control by the central bank :
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Increase in cash reserve ratio adversely affects the capacity of commercial banks to create credit.
Reason (R): An increase in cash reserve ratio reduces the excess reserves of commercial banks and hence limits their credit creating power.
State the impact of an increase in Cash Reserve Ratio on loanable funds.
Differentiate between quantitative and qualitative methods of credit control.
Define the following term:
Margin Requirements.
Explain the following function of the central bank of a country.
Fixation of margin requirement on secured loans.
