Theory question 106
Financial InstitutionsSection B (answer four questions only from this section)
What are the instruments used by the Central Bank to control the supply of money in any economy?
Show the model answer
Open market operations: selling securities to reduce money supply, buying to increase it.
Bank rate (minimum rediscount rate/monetary policy rate): raising it makes borrowing dearer and reduces credit.
Cash reserve ratio: raising the share of deposits banks must keep reduces their ability to lend.
Liquidity ratio: raising the required ratio of liquid assets reduces lending.
Special deposits: requiring banks to deposit funds with the central bank.
Selective credit control: directing credit to priority sectors and away from others.
Moral suasion: persuading banks to follow its policy.
Direct credit ceilings.
For each instrument say how it reduces or increases money supply.