Discount rate (bank rate), Managerial Economics

Assignment Help:

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.


Related Discussions:- Discount rate (bank rate)

Demand, what is demand estimation

what is demand estimation

Law of demand, explain the law of demand. briefly discuss the exception to ...

explain the law of demand. briefly discuss the exception to the law of demand

Walker''s theory of profit, Profit as rent of ability: one of the most wid...

Profit as rent of ability: one of the most widely known theories of profit was propounded by F.A. Walker. According to him profit is the rent of is the difference between the earn

Production planning in demand forecast period, Q. Production Planning in de...

Q. Production Planning in demand forecast period ? Long term production planning can assist the management in organising long term finances on practical terms and conditions. S

Discuss quantity demanded and supplied , Supply and Demand Discuss and...

Supply and Demand Discuss and analyze following statement: The Wall Street Journal reported that recent law school graduates were having a very difficult time obtaining jo

Monetary policy, Monetary policies This is the direction of the econom...

Monetary policies This is the direction of the economy through the variables of money supply and the price of money.  Expanding the supply of money and lowering the rate of in

What is managerial economics according to spencer, What is Managerial econo...

What is Managerial economics according to Spencer and Siegelman Spencer and Siegelman:  Managerial economics is "the integration of economic theory with business practice for t

Advertising budget, Analyse The Method By Which a Firm Can Allocate The Giv...

Analyse The Method By Which a Firm Can Allocate The Given Advertising Budget Between Different Media Of Advertisement

What is managerial economics according to mcgutgan and moye, What is Manage...

What is Managerial economics according to McGutgan and Moye McGutgan and Moyer:  "Managerial economics is the application of economic theory and methodology to decision-making

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd