Question

2 economic discusshow the central bank plays the role of controller of credit in an economy ? Give answers

Answer 1

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Central Banks Control the Supply of Money:-

1. Print More Money:-

• As no economy is pegged to a gold standard, central banks can increase the amount of money in circulation by simply printing it. They can print as much money as they want, though there are consequences for doing so.

2. Set the Reserve Requirement:-

• One of the basic methods used by all central banks to control the quantity of money in an economy is the reserve requirement. As a rule central banks mandate depository institutions to keep a certain amount of funds in reserve against the amount of net transaction accounts.

3. Influence Interest Rates:-

• In most cases, a central bank cannot directly set interest rates for loans such as mortgages, auto loans or personal loans. However the central bank does have certain tools to push interest rates towards desired levels.

4. Engage in Open Market Operations:-

• Central banks affect the quantity of money in circulation by buying or selling government securities through the process known as open market operations (OMO). When a central bank is looking to increase the quantity of money in circulation, it purchases government securities from commercial banks and institutions.

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