Test: Financial Institutions - 3 - JAMB MCQ

Budget deficit is not a monetary policy instrument. It refers to the situation when government expenditures exceed its revenues, leading to borrowing and an increase in the fiscal deficit. Monetary policy instruments are tools used by the central bank to regulate the money supply and influence economic conditions.

Open Market Operations (OMO) are used by the central bank to control the amount of money in circulation. In OMO, the central bank buys or sells government securities in the open market. When the central bank purchases government securities, it injects money into the system, increasing the money supply. Conversely, when it sells government securities, it absorbs money from the system, decreasing the money supply.

To decrease the money supply in the economy, the Central Bank can increase the Cash Reserve Ratio (CRR). The CRR is the percentage of deposits that commercial banks are required to hold as reserves with the central bank. By increasing the CRR, the central bank reduces the amount of money that banks can lend out, thereby decreasing the overall money supply.

The monetary policy instrument that directly influences the cost of borrowing for commercial banks is the Bank Rate. The Bank Rate is the interest rate at which the central bank lends money to commercial banks. By increasing or decreasing the Bank Rate, the central bank affects the cost at which commercial banks can borrow funds from the central bank, influencing the overall interest rates in the economy.

When the Central Bank increases the Cash Reserve Ratio (CRR), it is most likely to increase the reserve requirements of commercial banks. The CRR is the percentage of deposits that banks must keep as reserves with the central bank. By increasing the CRR, the central bank requires banks to hold a larger proportion of their deposits as reserves, reducing the amount available for lending. This helps control excessive lending and the money supply.

The interest rate at which the Central Bank lends money to commercial banks is known as the Bank Rate. This rate is determined by the central bank and is used to influence borrowing costs for commercial banks. By changing the Bank Rate, the central bank can encourage or discourage borrowing by commercial banks, affecting overall lending rates in the economy.

The Central Bank uses the Bank Rate to control inflation. By increasing the Bank Rate, the central bank raises the cost of borrowing for commercial banks, which, in turn, affects lending rates for businesses and consumers. Higher interest rates can reduce borrowing and spending, helping to control inflationary pressures in the economy.

Open Market Operations (OMO) involve the buying and selling of government securities. Government securities include treasury bills, bonds, and other debt instruments issued by the government. The central bank uses OMO to influence the money supply in the economy. When the central bank buys government securities, it injects money into the system, increasing the money supply. Conversely, when it sells government securities, it absorbs money from the system, decreasing the money supply.

When the Central Bank conducts open market purchases, it increases the money supply. Open market purchases involve the central bank buying government securities from banks and other financial institutions. In exchange for the securities, the central bank pays for them with newly created money, thereby injecting money into the system and increasing the money supply.

The statutory requirement for banks to maintain a certain percentage of their net demand and time liabilities in the form of cash is called the Statutory Liquidity Ratio (SLR). The SLR is a regulation imposed by the central bank that determines the minimum percentage of their deposits that banks must hold in the form of cash, gold, or government-approved securities. It helps ensure the liquidity and stability of banks and the banking system.