Question : The discount rate is the interest rate at which:
Option 1: Commercial banks borrow from the central bank
Option 2: Commercial banks lend to the central bank
Option 3: The government borrows from the central bank
Option 4: The central bank lends to the government
Correct Answer: Commercial banks borrow from the central bank
Solution : The correct answer is (a) commercial banks borrow from the central bank.
The central bank sets the discount rate, which represents the interest rate at which commercial banks can borrow funds directly from the central bank. The discount rate serves as a tool for the central bank to provide short-term liquidity to commercial banks or influence their borrowing behavior.
When commercial banks face liquidity shortages or need additional funds, they can borrow from the central bank's discount window. The discount window is the mechanism through which banks can access funds directly from the central bank. The discount rate charged by the central bank on these loans represents the cost of borrowing for the commercial banks.
It's worth noting that the discount rate is typically set higher than other short-term interest rates to encourage commercial banks to seek funds from other sources first, such as interbank lending or borrowing from the money market. The discount window is generally seen as a backstop for banks facing temporary liquidity challenges.
Question : The bank rate is the rate at which:
Option 1: RBI borrows from commercial banks
Option 2: RBI lends to commercial banks
Option 3: Commercial banks lend to customers
Option 4: Commercial banks borrow from RBI
Question : What is the term used to describe the rate at which a central bank lends money to commercial banks in a country?
Option 1: Interest rate
Option 2: Inflation rate
Option 3: Discount rate
Option 4: Exchange rate
Question : What is the meaning of reverse repo rate?
Option 1: The rate at which RBI borrows money from foreign banks.
Option 2: The rate at which RBI borrows money from commercial banks.
Option 3: The rate at which commercial banks borrow money from RBI.
Option 4: The rate at which commercial banks borrow money from foreign banks.
Question : The reverse repo rate is the rate at which Central Bank:
Option 1: Lends money to commercial banks short-term
Option 2: Lends money to commercial banks for long-term
Option 3: Accepts deposits from commercial banks
Option 4: None of these
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