A central bank in a developing country raises the bank rate from 5% to 8%.

What is the most likely effect on commercial bank lending?

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Question

A central bank in a developing country raises the bank rate from 5% to 8%.

What is the most likely effect on commercial bank lending?

Accepted Answer

Commercial banks will increase their lending rates — Award 1 mark for understanding that when the central bank raises the bank rate, the cost of borrowing for commercial banks increases, which they pass on to customers. B is incorrect — reserve requirements are set by the central bank, not commercial banks. C is incorrect — only central banks can print money. D is incorrect — commercial banks cannot change the bank rate.

Answer

Commercial banks will lower their reserve requirements

Answer

Commercial banks will increase their lending rates

Answer

Commercial banks will reduce the bank rate

Answer

Commercial banks will print more money

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