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Difficulty: MediumCentral Bank: Functions and Monetary Policy Instruments

When a monetary authority directs commercial banks to enforce specific lending quotas that favor vital production sectors like agriculture while curbing loan availability for non-essential luxury imports, which monetary policy instrument is being applied?

  1. A
    Open market operations
  2. Selective credit controlAnswer
  3. C
    Cash reserve ratio
  4. D
    Bank rate policy

Answer

Selective credit control
Selective credit control is a qualitative monetary policy instrument that allows the central bank to discriminate between economic activities, encouraging credit expansion to essential sectors like agriculture while discouraging credit for unproductive or speculative purposes.

Step-by-Step Solution

1
Identify the nature of the policy intervention described in the stem
The central bank intervention targets the distribution and destination of credit rather than changing the total volume of money in circulation.
Directing commercial banks to favor certain industries like agriculture while suppressing loans for luxury imports regulates credit usage by sector.
2
Classify the instrument as quantitative or selective (qualitative)
Quantitative instruments (such as OMO, bank rate, and reserve ratios) regulate total money supply indiscriminately, whereas qualitative/selective tools direct credit to designated sectors.
Sectoral lending quotas and selective restrictions fall under selective credit controls.

Key Concept

Selective (Qualitative) Monetary Policy Instruments
Estimated Time:1m 0s
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Topics

Central Bank: Functions and Monetary Policy Instruments

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