Central Bank Functions Quiz
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Questions and Answers

What action does the central bank take during a recession to encourage an expansion in lending and deposits?

  • Increase the required reserve ratio
  • Raise the bank rate
  • Decrease the required reserve ratio (correct)
  • Decrease the bank rate

    • What is the bank rate or discount rate?

  • Rate at which commercial banks lend to each other
  • Interest rate charged by the central bank on loans to commercial banks (correct)
  • Rate at which individuals borrow from commercial banks
  • Interest rate on loans from commercial banks to the central bank

    • How does an increase in the bank rate or discount rate affect borrowing costs?

  • Borrowing costs remain unchanged
  • Borrowing costs increase (correct)
  • Borrowing costs become zero
  • Borrowing costs decrease

    • During inflation, what action does the central bank take with regard to the interest rate?

    <p>Increases the interest rate</p> Signup and view all the answers

    How does reducing the bank rate during a recession impact credit creation?

    <p>Increases credit creation</p> Signup and view all the answers

    In what situation would a central bank increase its lending rate?

    <p>During inflation</p> Signup and view all the answers

    How does an increase in the required reserve ratio impact lending by commercial banks?

    <p>Decreases lending</p> Signup and view all the answers

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