CA Foundation Exam > CA Foundation Questions > In order to control credita)CRR should be inc...
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In order to control credit
- a)CRR should be increased and bank rate should be decreased
- b)CRR should be reduced and bank rate should be reduced
- c)CRR should be increased and bank rate should be increased
- d)CRR should be reduced and bank rate should be increased
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
In order to control credita)CRR should be increased and bank rate shou...
Understanding Credit Control
Credit control is a crucial part of monetary policy, primarily managed by a central bank, aimed at regulating the money supply and ensuring financial stability.
Key Terms Explained
- CRR (Cash Reserve Ratio): This is the percentage of a bank's total deposits that must be maintained as reserves with the central bank. A higher CRR reduces the available funds for banks to lend, thus tightening credit.
- Bank Rate: This is the rate at which the central bank lends money to commercial banks. An increase in the bank rate raises the cost of borrowing for banks, which is then passed on to consumers and businesses.
Why Option C is Correct
- Increased CRR: By increasing the CRR, the central bank restricts the amount of money that banks can use for lending. This leads to a contraction in credit availability, thereby controlling inflation and excessive borrowing.
- Increased Bank Rate: Raising the bank rate discourages banks from borrowing from the central bank. Consequently, banks will raise their lending rates to consumers, further reducing the demand for loans.
Combined Effect
- When both CRR and bank rate are increased, banks are compelled to reduce their lending activities. This effectively curtails credit growth in the economy, helping to stabilize prices and maintain economic equilibrium.
Conclusion
Thus, increasing CRR and the bank rate (Option C) is a robust strategy for controlling credit in the economy, ensuring that inflation is kept in check and financial stability is achieved.
Credit control is a crucial part of monetary policy, primarily managed by a central bank, aimed at regulating the money supply and ensuring financial stability.
Key Terms Explained
- CRR (Cash Reserve Ratio): This is the percentage of a bank's total deposits that must be maintained as reserves with the central bank. A higher CRR reduces the available funds for banks to lend, thus tightening credit.
- Bank Rate: This is the rate at which the central bank lends money to commercial banks. An increase in the bank rate raises the cost of borrowing for banks, which is then passed on to consumers and businesses.
Why Option C is Correct
- Increased CRR: By increasing the CRR, the central bank restricts the amount of money that banks can use for lending. This leads to a contraction in credit availability, thereby controlling inflation and excessive borrowing.
- Increased Bank Rate: Raising the bank rate discourages banks from borrowing from the central bank. Consequently, banks will raise their lending rates to consumers, further reducing the demand for loans.
Combined Effect
- When both CRR and bank rate are increased, banks are compelled to reduce their lending activities. This effectively curtails credit growth in the economy, helping to stabilize prices and maintain economic equilibrium.
Conclusion
Thus, increasing CRR and the bank rate (Option C) is a robust strategy for controlling credit in the economy, ensuring that inflation is kept in check and financial stability is achieved.
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