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Difficulty: EasyCentral Bank: Functions and Monetary Policy Instruments

Match each monetary policy instrument of the Central Bank with its correct operational description.

  • Bank RateThe minimum interest rate at which the central bank rediscounts eligible bills or extends loans to commercial banks.
  • Moral SuasionInformal appeals, guidelines, and persuasive advice issued to commercial banks without statutory compulsion.
  • Cash Reserve RatioThe mandatory percentage of deposit liabilities that commercial banks must maintain as cash reserves with the central bank.
  • Open Market OperationsThe buying and selling of government securities in the open market to regulate the volume of money in circulation.

Answer

Bank Rate corresponds to the minimum interest rate at which the central bank rediscounts eligible bills or extends loans to commercial banks. Moral Suasion corresponds to informal appeals, guidelines, and persuasive advice issued to commercial banks without statutory compulsion. Cash Reserve Ratio corresponds to the mandatory percentage of deposit liabilities that commercial banks must maintain as cash reserves with the central bank. Open Market Operations corresponds to the buying and selling of government securities in the open market to regulate the volume of money in circulation.
Each central bank monetary tool is matched to its direct definition: Bank Rate is the rediscount borrowing interest rate, Moral Suasion is non-statutory informal persuasion, Cash Reserve Ratio is the specified fraction of customer deposits held in reserve, and Open Market Operations is the trading of government debt instruments.

Step-by-Step Solution

1
Examine Bank Rate and match it to its core functional meaning.
Bank Rate matches the official rate set by the central bank to rediscount bills or lend money to commercial banks.
Bank rate directly influences the cost of borrowing for commercial banks.
2
Examine Moral Suasion and match it to its operational approach.
Moral Suasion matches informal persuasive directives offered to financial institutions without statutory force.
Moral suasion relies on moral influence and cooperation rather than legal penalties.
3
Examine Cash Reserve Ratio and match it to its regulatory requirement.
Cash Reserve Ratio matches the legally required fraction of bank deposits kept with the central bank.
This tool directly limits commercial bank credit creation capacity.
4
Examine Open Market Operations and match it to its market activity.
Open Market Operations matches buying and selling government securities to control liquidity.
Selling securities withdraws liquidity from commercial banks, while purchasing securities injects liquidity.

Key Concept

Central Bank Monetary Policy Instruments
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Topics

Central Bank: Functions and Monetary Policy Instruments

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