Discount rate (bank rate), Managerial Economics

Discount Rate (Bank Rate)

This is the rate on central bank advances and is also called official discount rate or "minimum lending rate".  When commercial banks find themselves short of cash they may, instead of contracting bank deposits, go to the central bank, which can make additional cash available in its capacity as  "lender of last resort", to help the banks out of their difficulties.  The Central Bank can make cash available on a short-term basis in either of two ways; by lending cash directly, charging a rate of interest which is referred to as the official "discount rate", or by buying approved short-term securities from the commercial banks.  The central bank exercises regulatory powers as a lender of last resort by making this help both more expensive to get and more difficult to get.  It can do the former by charging a very high "penal" rate of interest, well above other short-term rates ruling in the money market.  Similarly, when it makes cash available by buying approved short-term securities, it can charge a high effective rate of interest by buying them at low prices.  The effective rate of interest charged when central bank buys securities (supplying cash) is in fact a re-discount rate, since the bank is buying securities which are already on the market but at a discount.

The significance of this rate of interest charged by the central bank in one way or the other to commercial banks, as a lender of last resort, is that if this rate goes up the commercial banks, who find that their costs of borrowing have increased, are likely to raise the rates of interest on their lending to businessman and other borrowers.  Other interest rates such as those charged by building societies on house mortgages, are then also likely to be pulled up.

Posted Date: 11/29/2012 4:50:53 AM | Location : United States







Related Discussions:- Discount rate (bank rate), Assignment Help, Ask Question on Discount rate (bank rate), Get Answer, Expert's Help, Discount rate (bank rate) Discussions

Write discussion on Discount rate (bank rate)
Your posts are moderated
Related Questions
Thinking about modifications in the model again: Go back to the original model again, but add a marginal propensity to invest, this is, suppose  that I = f ( i and Y). The MPI is d

The gap between theory and practise and the role of managerial economics: We have noted above that application of theories to the process of business decision making contributes a

Properties of Indifference Curves An indifference curve is usually convex to the origin. Indifference curves slope downwards from left to right. A set

ECONOMIC EFFECTS OF TAXATION a.  A deterrent to work Heavy direct taxation, especially when closely linked to current earnings, can act as a serious check to production

CHARACTERISTICS OF MANAGERIAL ECONOMICS 1. Uses theory of firm: Managerial economics uses economic principles and conceptsthat are known as theory of Firm or 'Economics of the

Why do the managers in marris model maximise their satisfaction by choosing a higher growth rate and a lower valuation ratio when compared to the profit maximisation


APPROACHES TO MEASURING NATIONAL INCOME The compilation of national income statistics is a very laborious task.  The total wealth of a nation has to be added up and there are


Desire for a commodity This validates that a want or a desire doesn't develop into a demand except it is supported by the ability and willingness to acquire it. For example, a