alleryStart learning →An increase in the bank rate affects the money supply by making
Abank borrowing costlier, so supply falls
Bbank borrowing cheaper, so supply rises
Cdeposits compulsory, so supply falls
Dbonds tax free, so supply rises
Answer & Solution
Correct answer: A. bank borrowing costlier, so supply falls
1. The bank rate is what the RBI charges commercial banks for loans.
2. Raising it makes those loans more expensive.
3. Banks then hold fewer reserves, so the money supply **falls**.
4. A cut in the bank rate works the other way and raises money supply, which is why the second option is offered.
_Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY_
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