Limitation of bank rate, Managerial Economics

Limitation

The degree or success with which the central bank can use its bank rate policy to control the total credit in the economy depends upon the interest elasticity of investment demand. During boom the demand for bank credit by the business community may be highly interest inelastic. When the entrepreneurs are over optimistic and consequently the marginal productivity of investment in high. The demand for bank credit cannot be curtailed simply by raising the bank rate by the central bank . if the investors expect that the value of their investment will appreciate, say by 10 per cent annum then even a rise of a as high as 10 per cent per annum in the money interest rate will not deter them from borrowing from the commercial banks. Moreover, in many business undertakings interest rate constitutes a negligible proportion of the total unit cost of production . consequently , for such business the demand for bank credit is highly interest inelastic. Although in the long period the bank rate is bound to influence the stock market and the business yield expectations, but it may be too late to cheek evil when the seeds of destruction have been already sown.

The bank rate policy proves more ineffective during depression than during the boom. Any depression involves tedious readjustments of one type or the other. Serious depression gives a sharp blow to business confidence which only a considerable time factor can revive. Consequently, at this time the demand for bank credit become highly interest inelastic. Businessmen do not borrow even at the maximum facilities provided by the commercial banks. When sales are falling off quickly an idle plant capacity in increasing over the entire community, the investors cannot be easily persuaded to increase or even to continue the flow of their borrowing . Nobody will install any new plant for a remote and uncertain demand. Even if the interest rate falls to zero, or even becomes negative (which is not possible ) no inducement to invest may be caused. If the fall in prices is expected to continue, no conceivable fall in its bank rate by the central bank and through it in the lending rates of the commercial bank will initiate recovery in the economy in the economy. Thus the bank rate policy suffers from serious limitations and central bank cannot eliminate the occurrence of both and s slump from the economy merely by raising or lowering the bank rate.

Posted Date: 12/1/2012 7:07:32 AM | Location : United States







Related Discussions:- Limitation of bank rate, Assignment Help, Ask Question on Limitation of bank rate, Get Answer, Expert's Help, Limitation of bank rate Discussions

Write discussion on Limitation of bank rate
Your posts are moderated
Related Questions
is the sales maximization applicable

Benefits are: 1) People can create their own decisions 2) The government has limited control, which is good for arrangement 3) Gives freedoms like Enterprise, ownership,

State the relevant economic quantities Managerial economics helps the management in predicting numerous economic quantities like profit, cost, capital, demand, price, productio

discuss the significance of managerial economics in regards to business strategies employed by business entities currently operating in the global economy

Utility Utility is the amount of satisfaction derived from the consumption of a commodity or service at a particular time.  Utility is not inherent but a psychological satisfa

Planned Economy Is a system where all major economic decisions are made by a government ministry or planning organisation. Here all questions about the allocation of resources

Question 1: (a) Briefly explain and distinguish between a centrally planned, laissez-faire and mixed economy. (b) According to you, which kind of economic system is most d

The market demand for brand X has been estimated as Qx=1500-3Px-0.05I-2.5Py+7.5Pz

A monopolist faces a straight line demand curve which passes through the point Rs 10 per ton on the price-cost axis and through the point 8000 tons on the quantity axis. The fir

A. Define inflation. Explain the role of inflation during inflation and deflation. B. Managerial economics is a form of economics for managers do you agrees? explain you comment