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Money and Banking — Economics STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceEconomicsMoney and Banking4 Marks
Question
How do changes in bank rate affect money creation by Commercial Banks? Explain.
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Answer

Bank rate is the rate of interest at which the central banks lends money to the commercial banks. Suppose the central bank raises the bank rate. Since borrowing by the commercial banks becomes costlier, commercial banks are forced to increase the rate of interest they charge on borrowing by public. This reduces demand for borrowing and adversely affects deposit/money creation by commercial banks.

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