Question

For controlling inflation, bank rate is

• A. increased
• B. decreased
• C. kept constant
• D. is made zero

Hint:

To cool down an overheating economy (inflation), the central bank raises interest rates to make money more expensive.

Answer 1

The Correct Option is A

To control inflation (a situation of rising prices, often caused by too much money chasing too few goods), the central bank implements a contractionary monetary policy. One key tool is to increase the bank rate. This makes borrowing from the central bank more expensive for commercial banks. They, in turn, increase their lending rates, which discourages borrowing by the public and businesses. This reduces the money supply and aggregate demand, helping to curb inflation.