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Explain How ‘Bank Rate' is Helpful in Controlling Credit Creation? - Economics

Explain how ‘bank rate' is helpful in controlling credit creation?

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Solution

Bank rate is the rate at which the central bank provides credit to commercial banks. An increase or decrease in the bank rate leads to an increase or decrease in the market rate of interest. Thereby the cost of credit changes in the market. During inflation, increase in the bank rate increases the cost of capital which reduces the flow of credit.

Concept: Central Bank Function - Controller of Credit
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