Question

How can the central bank increase the availability of credit?

• A. Increasing repo rate
• B. Increasing reverse repo rate
• C. Buying government securities
• D. Selling government securities

Hint:

When the central bank buys government securities, it injects money into the banking system, increasing credit availability and encouraging lending.

Answer 1

The Correct Option is C

Step 1: Understanding Credit Availability:
The central bank controls the availability of credit in the economy by adjusting interest rates and engaging in open market operations. The main goal is to influence the amount of money circulating in the economy, which affects lending and borrowing activity.
Step 2: Analyzing the Options:
- Option (A) Increasing repo rate: The repo rate is the rate at which commercial banks borrow money from the central bank. Increasing the repo rate makes borrowing more expensive for commercial banks, which reduces their ability to lend. Therefore, increasing the repo rate would decrease credit availability, not increase it.
- Option (B) Increasing reverse repo rate: The reverse repo rate is the rate at which commercial banks park their excess reserves with the central bank. Increasing this rate encourages banks to hold onto their reserves rather than lending them out, which also reduces the availability of credit.
- Option (C) Buying government securities: This is the correct answer. When the central bank buys government securities, it injects money into the economy, increasing the reserves of commercial banks. With more reserves, banks can lend more, thereby increasing the availability of credit.
- Option (D) Selling government securities: Selling government securities has the opposite effect; it removes money from the banking system, reducing reserves and making credit less available.
Step 3: Conclusion and Answer:
The correct answer is (C) because buying government securities increases the money supply in the economy, allowing banks to lend more and thus increasing credit availability.