Question : The central bank may________ to discourage credit in the economy.
Option 1: decrease CRR
Option 2: buy securities in an open market
Option 3: reduce SLR
Option 4: increase bank rate
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Correct Answer: increase bank rate
Solution : The correct option is to increase the bank rate .
Bank rates influence the lending rates of commercial banks. Higher bank rates will translate to higher lending rates by the banks. To curb liquidity, the central bank can resort to raising the bank rate and vice versa. When the bank rate is increased, this reduces borrowing by commercial banks, implying a reduction in their cash reserves and, therefore, a reduction in their capacity to create credit.
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