Pair each central bank function or monetary policy instrument in List I with its primary operational mechanism or objective in List II.
- Special DepositsCompelling commercial banks to freeze an extra percentage of their deposit liabilities with the apex bank to contract credit creation capacity.
- Lender of Last ResortProviding short-term emergency liquidity support to solvent commercial banks facing unexpected cash shortages to prevent systemic panic.
- Bank Rate AdjustmentAltering the official rediscount rate on central bank loans to influence commercial bank lending rates and general market borrowing costs.
- Moral SuasionEmploying qualitative directives and informal meetings to persuade commercial banks to align credit allocation with national economic objectives.
Answer
Special Deposits matches with compelling commercial banks to freeze an extra percentage of deposits; Lender of Last Resort matches with providing short-term emergency liquidity support; Bank Rate Adjustment matches with altering the official rediscount rate to influence commercial borrowing costs; Moral Suasion matches with employing qualitative directives and informal meetings to persuade commercial banks.
Special Deposits requires commercial banks to lock up specific proportions of cash reserves at the central bank. Lender of Last Resort represents the traditional stabilizing function where the central bank provides emergency funds to solvent banks during liquidity strain. Bank Rate Adjustment works by changing the baseline cost of central bank credit to commercial institutions. Moral Suasion utilizes qualitative appeals and managerial directives rather than compulsory legal instruments.
Step-by-Step Solution
Key Concept
Central Bank Functions and Monetary Policy Instruments