Question

The Central Bank can reduce the Money Supply in economy by ______ the ______.

Options

• increasing, bank rate

• decreasing, cash reserve ratio

• decreasing, bank rate

• buying, government securities 

Answer 1

The Central Bank can reduce the Money Supply in economy by increasing the bank rate.

Explanation:

• The central bank can restrict the money supply by increasing the bank rates in the economy.
• The bank rate is the rate at which the central bank loans money to commercial banks for an extended period of time.
• When bank rates rise, journal public interest rates rise as well, reducing commercial banks' lending capacity and causing a drop in the economy's money supply.