Economics MCQ - Economics Section 2
Generally speaking, the higher the policy rate, the higher the potential
penalty that banks will have to pay to the central bank. If they run short
of liquidity, the greater will be their willingness to reduce lending, and the
more likely that broad money growth will shrink.
Increasing the reserve requirement will decrease the money supply,
money multiplier and new deposits.
In accordance to the monetary transmission mechanism, implementation
of the policy is most likely to work through the economy via four channels
i.e. bank lending rates, exchange rates, asset prices, and expectations or
confidence.
A change in a central bank’s policy rate will affect both asset prices and
expectations about future interest rates.
