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)

Using total expenditure for calculating national income, Using Total Expend...

Using Total Expenditure for Calculating National Income The expenditure approach centres on the components of final demand which generate production.  It thus measures GDP

Average total costs (atc), Average Total Costs (ATC) This is total cos...

Average Total Costs (ATC) This is total cost per unit of output, obtained by dividing total cost by total output i.e. ATC   =   Total Cost              Total Outp

Managerial economics, present a detailed discussion of the principles of ma...

present a detailed discussion of the principles of managerial economics

Explain the point and arc elasticity of demand, Point and arc elasticity of...

Point and arc elasticity of demand The elasticity of demand is conventionally measured either at a finite point or between any two finite points, on demand curve. The elasticit

Price elasticity of demand and the slope of the demand curve, Price Elastic...

Price Elasticity of Demand and the slope of the Demand Curve Elasticity determines the shape of the demand curve. From the formulas

Show the properties of isoquants, Q. Show the Properties of isoquants? ...

Q. Show the Properties of isoquants? Isoquants slope downwards to the right:   It means that, in order to keep output constant; when amount of one factor is increased then the

Mankiw model of nominal rigidities, Mankiw Model of Nominal Rigidities   ...

Mankiw Model of Nominal Rigidities   There are two related reasons for which  firms do not  frequently change prices. First, as we saw in the discussion on menu costs, the cost

Elasticity, determinants of price expectation of elasticity

determinants of price expectation of elasticity

Problems of prices and incomes policy, Problems of prices and Incomes polic...

Problems of prices and Incomes policy i. Confrontation The imposition of the prices and incomes policy, voluntary or statutory, risks the possibility of confrontation w

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