Question 41
Financial InstitutionsOne method through which the Central Bank can restrict the commercial banks' power of credit expansion is to
- A.demand for increased special deposits
- B.decrease the cash ratio
- C.buy securities in the open market
- D.reduce the rate of interests at which banks borrow from it.
Show the answer and explanation
Answer: A (demand for increased special deposits)
Explanation
Special deposits lock part of the banks' cash at the Central Bank, leaving less for lending. The other options expand credit.