Question

The central bank can increase availability of credit by: (Choose the correct alternative)

(a) Raising repo rate

(b) Raising reverse repo rate

(c) Buying government securities

(d) Selling government securities

Answer 1

Buying government securities

The central bank buys government securities from the public through the banks. This results in the transfer of money form Central bank to the commercial banks and increases the credit creation capacity of the commercial banks. Hence, the central Bank can increase availability of credit by buying the government securities.