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JAMB Economics 2007 Question 29

Question 29

Financial Institutions

A reduction in the bank rate encourages commercial banks to create money by

  1. A.raising the interest rate
  2. B.decreasing the interest rate
  3. C.maintaining the interest rate
  4. D.doubling the interest rate
Show the answer and explanation

Answer: B (decreasing the interest rate)

Explanation

Cheaper central bank funds let commercial banks lower their own lending rates, so more people borrow and more money is created.