Question

Name any two quantitative tools to control credit creation in an economy.
Or
What are demand deposits?

Answer 1

Answer:

Two quantitative tools to control credit creation

1-  The central bank rate setting mechanism

2- Cash reserve ratio

Explanation:

A: his is the Monetary Policy Committee interest rates that then influence the inter bank lending market and repo market. It’s also the rate which is used for discounting future cash flows of derivatives instruments and new bond issues. This helps to control the demand and supply of new credit. A fall in rate increases demand and a rise reduces demand for credit.

B: his is the proportion of bank deposits that the banks must keep to ensure liquidity in the credit created by them. Since, otherwise banks could simply give out loans and credit cards, thereby creating new cash out of thin air, more than the money they have received from savers. If all savers came to the bank requesting redemption, the bank may not be able to meet the demand.

Answer 2

Answer:

Two quantitative tools to control credit creation in an economy are :

1. Bank rate

2. Repo rate.

Explanation:

• Bank rate is the rate charged by the central bank for lending funds to any commercial banks.

• The lending rates of commercial banks is influenced by Bank rate .

• Higher bank rate will result higher lending rates by the banks.

• Bank rate is the lending rate at which commercial banks can borrow from the RBI without providing any security where as repo rate is the rate at which the RBI lends to commercial banks by purchasing the securities