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Difficulty: MediumCentral Bank: Functions and Monetary Policy Instruments

To stimulate growth in key developmental sectors such as agriculture and manufacturing without restricting the overall credit supply across the entire economy, the central bank directs commercial banks to allocate specific percentages of their loan portfolios to these designated sectors. Which type of monetary policy instrument is being deployed in this scenario?

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

Answer

Selective credit control
Selective credit control (also known as qualitative monetary control) refers to central bank measures intended to regulate the flow of credit into specific sectors or uses in the economy. Directing commercial banks to allocate explicit loan quotas to priority sectors like agriculture and manufacturing fits this definition.

Step-by-Step Solution

1
Analyze the central bank's objective and implementation strategy in the given scenario.
The central bank is targeting specific sectors (agriculture and manufacturing) using credit allocation quotas rather than altering the total volume of money circulating in the economy.
Distinguishing between policies that alter aggregate credit volume versus policies that steer credit to particular uses determines the category of monetary instrument.
2
Classify the instrument as quantitative (general) or qualitative (selective).
Instruments that influence the destination or allocation of credit rather than its overall quantity are classified as selective or qualitative credit controls.
Quantitative tools (such as Open Market Operations, reserve requirements, and bank rates) affect the overall liquidity indiscriminate of sector, while qualitative/selective tools focus on sector-specific credit distribution.

Key Concept

Distinction between Quantitative and Qualitative/Selective Monetary Policy Instruments
Estimated Time:1m 0s
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Topics

Central Bank: Functions and Monetary Policy Instruments

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