Question

Explain the effect of an increase in bank rate on credit creation by commercial banks.

Answer 1

Increase in the bank rate will make the loans more expensive for the commercial banks; thereby pressurizing the banks to increase the rate of lending. The public capacity to take credit will gradually fall by leading to the fall in the volume of credit demanded. The reverse happens in case of a decrease in the bank rate. The increased lending capacity of banks as well as increased public demand of credit will automatically lead to a rise in the volume of the credit.