question_answer

What is bank rate? How does it work as a method of credit control?               "Introduction of money has separated the acts of sale and purchase". Explain how?

Answer:

            Bank rate refers to the minimum rate at which the Central Bank of a country gives credit to the commercial banks without any collateral. Increase in the bank rate increases the rate of interest and the cost of borrowings goes up, which discourages borrowers from taking loans which reduces the ability of commercial banks to create credit. On the other hand, a decrease in the bank rate decreases the rate interest and the cost of borrowings goes down, which encourages borrowers to demand more loans and credit is expanded,                                                                           Under the Barter system of exchange, acts of sale and purchase of a good or service were to occur at the same point of time. To buy a thing, an individual must at the same time sell something needed by the other person. But with the introduction of money (as a medium of exchange), an individual can buy a good with money without selling anything at the same time. Likewise, he can sell a good for money without buying anything at the same time. Thus, with the introduction of money, acts of sale and purchase have been separated.