Question on: JAMB Economics - 1995
One method through which the Central Bank can restrict the commercial banks' power of credit expansion is to?
The Central Bank restricts commercial banks' credit expansion through several mechanisms.
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Demand for increased special deposit: Requiring commercial banks to hold a larger portion of their deposits as special deposits with the Central Bank reduces the funds available for lending, thereby limiting credit expansion.
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Decrease the cash ratio: This action would increase the amount of money available for lending and would not restrict credit expansion.
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Buy securities in the open market: This injects money into the banking system, allowing for more lending and thus expanding credit.
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Reduce the rate of interest at which banks borrow from it: This is also known as the discount rate. Reducing the discount rate lowers the cost of borrowing for commercial banks, which can encourage them to lend more, expanding credit.
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