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Question

An increase in the Bank Rate generally indicates that the

(a) market rate of interest is likely to fall
(b) Central Bank is no longer making loans to commercial banks
(c) Central Bank is following an easy money policy
(d) Central Bank is following a tight money policy

Answer:

D

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Explanation:

The Bank Rate is the rate at which the central bank (such as the Reserve Bank of India) lends money to commercial banks and acts as a benchmark for interest rates in the economy. An increase in the Bank Rate signifies that the central bank is raising the cost of borrowing for commercial banks.

When the central bank increases the Bank Rate, it becomes more expensive for commercial banks to borrow funds from the central bank. This, in turn, reduces the amount of money available for lending by commercial banks to businesses and individuals. As a result, the availability of credit in the economy decreases, and interest rates in the market tend to rise.

A higher Bank Rate indicates that the central bank is adopting a tight monetary policy stance to control inflation, curb excessive borrowing, or address other economic concerns. It aims to reduce liquidity in the banking system and moderate economic activity.

Therefore, an increase in the Bank Rate generally indicates that the central bank is following a tight money policy.

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