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)

Describe the status goods of law of demand, Describe the Status goods of la...

Describe the Status goods of law of demand The law doesn't concern the commodities that function as a 'status symbol', add to the social status or exhibit prosperity and opulen

determine the wage rate , Northern Lumber operates a large lumber-processi...

Northern Lumber operates a large lumber-processing mill in a small town in Washington State.  It is one of the larger lumber producers in the region and has some market power in th

Disadvantages of the planned economy, Disadvantages of the Planned System ...

Disadvantages of the Planned System The centrally planned economies suffer from the following limitations: Lack of choice:   Consumers have little influence over what is p

Unit elasticity of supply, Unit Elasticity of Supply Supply is said to...

Unit Elasticity of Supply Supply is said to be of unit elasticity if changes in price bring about changes in quantity supplied in the same proportion.  Thus, when price rises,

Wastes of monopolistic competition excess capacity, It indicates the amount...

It indicates the amount of output by that long run output of the firm under monopolistic competition falls short of the Ideal output. This is regarded as wastage in monopolistic co

Profit maximization, arguments in favour of traditional theory of profit ma...

arguments in favour of traditional theory of profit maximization

Definition of perfect competition, 1. Prof. Marshall 'The more nearly perfe...

1. Prof. Marshall 'The more nearly perfect a market is, the stronger is the tendency for same price to be paid for same thing at the same time in all parts of the market". 2. Pr

Investment, Investment   Investment is the process of increasing the ...

Investment   Investment is the process of increasing the productive capital stock of a country, or can be defined as the production of goods not for immediate consumption.  T

Case syudy., Please read the case study given below and answer questions gi...

Please read the case study given below and answer questions given. Case Study Electron Control, Inc., sells voltage regulators to other manufacturers, who then cu

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