Question

If in an economy Bank rate is increased, how will it affect the demand for credit? Explain.

Answer 1

Bank Rate: It is the interest rate at which a country's central bank lends to commercial banks for an extended period of time.

Effect of Increase in Bank Rate on Credit:

1. When the economy is experiencing excess demand, the Central Bank raises interest rates.
2. Commercial banks raise lending rates as a result of this action.
3. Credit becomes more expensive as a result of this.
4. As a result, demand for credit falls.