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Question
Which of the following statements are correct and which are incorrect? Give reasons.
- Central bank is a currency authority.
- Bank rate is a qualitative method of credit control.
- Quantitative methods regulate direction of credit.
- Bank rate is the rate at which commercial banks give loans to the public.
- Central bank should sell government securities when credit is to be expanded.
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Solution
- Correct
Reason: The central bank is the authority in charge of issuing currency in the country. It regulates the money supply and ensures that the currency remains stable. - Incorrect
Reason: Bank rates are a quantitative form of credit control. It refers to the interest rate at which the central bank lends to commercial banks, which influences the total money supply. - Incorrect
Reason: Quantitative methods control the volume of credit, not the direction. Margin limitations and selective credit control are two qualitative approaches for directing credit to particular sectors. - Incorrect
Reason: The bank rate refers to the rate at which the central bank lends to commercial banks rather than the general population. Commercial banks utilise this rate to determine their lending rates. - Incorrect
Reason: The central bank sells government securities to limit the economy's credit and liquidity. The central bank often purchases government assets to expand credit, pushing funds into the financial sector.
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RELATED QUESTIONS
Which of the following is a selective/qualitative method of credit control?
During deflation, the Central Bank usually ______.
Which of the following is not a quantitative method of credit control?
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 |
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.
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Bank rate is a quantitative instrument of monetary policy.
Reason (R): During inflation, RBI reduces the bank rate.
What is meant by open market operations?
Define the following term:
Cash Reserve Ratio.
Identify the following Credit Control measure undertaken by the Central Bank during inflation.
The Central Bank sells government approved securities to the public.
Describe two quantitative credit control measures of the Central Bank.
