explain briefly central bank,s function of credit control.
Answers
Explanation:
The chief objective of the central bank is to maintain price and economic stability. Price instability—both inflation and deflation—has harmful effects. Moreover, fluctuations in overall economic activity, that is, trade cycles entail a lot of human sufferings.
Main reason for the fluctuations in prices as well as in overall economic activity is the changes in aggregate demand. Aggregate demand, especially the investment demand, depends upon the supply of money. And credit these days is the important constituent of the money supply. Thus the supply of credit greatly affects the prices, national income and employment through changes in investment demand.
Now it is the responsibility of the central bank of a country to guide the money market, i.e., the commercial banks regarding supply of credit so as to maintain stability in prices as well as in overall economic activity. To overcome inflation it has to restrict the supply of credit and to prevent or get rid of depression and deflation it has to expand the credit. There are various methods by which the central bank can control the supply of credit in the economy.
These methods are:
(a) Varying the bank rate;
(b) Engaging in open market operations; and
(c) Changing the reserve ratio, and
(d) Exercising selective credit controls.
It is through controlling the supply of credit and cost of credit (i.e., rate of interest on it) that the central bank of a country tries to bring about stability in prices as well as in overall level of economic activity. The central bank is the monetary authority of the country and monetary policy is one of the important measures which are taken to avoid and cure both depression and inflation.