central banks Flashcards
what are quantitative methods of credit control?
–> influence the total volume of credit
what are qualitative methods of credit control?
–> regulate the flow of credit
how does the central bank act as a custodian of foreign exchange reserves
- -> overcome balance of payments
- -> maintain stability in the exchange rate
3 ways in which RBI assists commercial banks
- -> as the clearing agent
- -> as lender of the last resort
- -> as custodian of cash reserves
what is monetary policy?
it is the policy implemented by the RBI to control and regulate the money supply
what happens when the bank rate is increased
- -> increased rate of interest
- -> discourages businessmen from borrowing
- -> reducing volume of credit
define cash reserve ratio
it is the
–> minimum percentage of total demand and time deposits
–> to be kept by the commercial banks with the central banks
what happens when the cash reserve ratio is increased
- -> happens during inflation
- -> reduces excess reserves of the commercial banks and limits their lending powers
- -> less credit is given
- -> decreases aggregate demand
define credit rationing
aims at limiting the maximum amount of bank loans and advances
how is credit rationing used to control inflation?
–> central bank may fix the maximum amount of loans and advances which can be given by a commercial bank
–> the central bank may fix the maximum ratio of loans and advances of a commercial bank to its total deposits
5 reasons why is a central bank needed
–> achieve full employment and price stability
–> for proper maintenance of the banking activities of the government
–> to control and maintain uniformity in the issue of currency
–> to control the credit expansion or contraction activities of the commercial banks
–> to supervise, regulate and control the monetary sector of an economy
