If an economy is to control credit, which of the following can be appropriate:

Ans – (c)

Explanation:-

The Reserve Bank of India (RBI) is empowered to regulate the money supply in the economy through its ‘Monetary Policy’.

It is the policy adopted by the Central Bank of an economy in the direction of credit control or money supply.

As RBI has the sole monopoly in currency issues, it can control the credit supply of money.

For this, RBI makes use of the following instruments of Monetary Policy:

Repo Rate:-

Repo Rate is the rate at which the Central bank of a country lends money to commercial banks to meet their short-term needs.

The central bank advances loans against approved securities or eligible bills of exchange.

A decrease in repo rate decreases their lending rates. Which encourages borrowers to take loans.

It increases the ability of commercial banks to create credit.

An increase in the repo rate will have the opposite effect.

Cash Reserve Ratio (CRR):

It refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central bank.

A change in CRR affects the ability of commercial banks to create credit.

For instance, a decrease in CRR increases the excess reserves of commercial banks and increases their credit-creating power.

An increase in CRR will have the opposite effect.