(a) Explain how using ‘‘Bank Rate’’ the Central Bank can regulate money supply in an economy.

(b) What is meant by ‘Repo Rate’?

a)

● Bank rate is the rate at which the central bank provides loans to commercial banks.

● This is a helpful instrument to control the money supply.

● If the central bank increases the bank rate, the loans would become more costly for the commercial bank. They would then have to increase their rate of lending. The public would demand fewer loans leading to a fall in the credit demanded.

● If the central bank decreases the bank rate, the loans would become cheaper for the commercial bank. They would then have to increase their rate of lending. The public would then have an increase in the demand for credit.

b) Repo rate is the rate at which the central bank of a country lends money to the commercial bank in case of any shortfall of funds. It is used by a monetary authority to control inflation.