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Difficulty: EasyCentral Bank: Functions and Monetary Policy Instruments

Match each monetary policy instrument or Central Bank function in Column I with its correct operational description in Column II.

  • Open Market Operations (OMO)Direct buying and selling of treasury bills and government securities to regulate money supply
  • Bank RateThe interest rate at which the central bank lends money to commercial banks as a lender of last resort
  • Cash Reserve Ratio (CRR)The minimum percentage of total deposits that commercial banks must keep with the central bank
  • Moral SuasionInformal advice or persuasive directives issued to commercial banks to regulate credit expansion

Answer

Open Market Operations matches with direct buying and selling of treasury bills and government securities; Bank Rate matches with the interest rate charged to commercial banks; Cash Reserve Ratio matches with the minimum percentage of deposits kept with the central bank; Moral Suasion matches with informal advice or persuasive directives.
Each monetary instrument correctly pairs with its specific operational mechanism: Open Market Operations involves trading government debt instruments; Bank Rate is the central bank's discount rate; Cash Reserve Ratio specifies required statutory reserves; and Moral Suasion consists of qualitative persuasion.

Step-by-Step Solution

1
Identify quantitative market trading instruments
Open Market Operations refers directly to the trading of government securities such as treasury bills in the financial market to influence liquidity.
Central banks purchase securities to expand money supply and sell securities to contract it.
2
Identify key interest rate tools
Bank Rate corresponds to the interest rate levied by the central bank when providing loans or rediscounting bills for commercial banking institutions.
Changes in the bank rate influence the cost of borrowing for commercial banks and consequently their lending rates to the public.
3
Identify reserve requirement regulations
Cash Reserve Ratio matches the regulatory requirement mandating banks to keep a fixed portion of their deposit liabilities with the central bank.
Adjusting the ratio alters the volume of excess reserves available for lending by commercial banks.
4
Identify qualitative/selective credit control tools
Moral Suasion aligns with informal persuasion and policy advice used by central bankers without resorting to statutory sanctions.
It relies on co-operation between commercial banks and the central monetary authority.

Key Concept

Central Bank monetary policy instruments (quantitative and qualitative) and their operational mechanisms
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Topics

Central Bank: Functions and Monetary Policy Instruments

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