Question

What is the effect of an increase in the bank rate on the volume of credit?

• A. Volume of credit increases with an decrease in interest rate
• B. Volume of credit increases with no change in interest rate
• C. Volume of credit decreases with an increase in interest rate
• D. Volume of credit remains the same with an increase in interest rate

Answer 1

The correct option is C

Volume of credit decreases with an increase in interest rate

An increase in the bank rate will cause the banks to increase the interest at which they lend. This in turn will discourage businessmen to borrow from banks and lead to an overall reduction in the volume of credit.