Multiple choice

In order to control credit and investment, the Central Bank should

  1. decrease cash reserve ratio

  2. decrease bank rate

  3. buy securities in the open market

  4. sell securities in the open market
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

To control credit and investment, the Central Bank should follow contractionary monetary policy. Selling securities in the open market reduces money supply as banks and public pay money to buy these securities. This reduces reserves with commercial banks, decreasing their lending capacity. Options A, B, and C are all expansionary measures that increase credit and investment.

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