Question

What situations would result in lowering of interest rates by the banking authority of a​ country?

Answer 1

Increase in Money Supply : By - Increase in LRR, Increase in Marginal Requirement, Purchase of securities in OMO

Step-by-step explanation:

Money Supply & Interest Rate are inversely related. Higher money supply is cheaper, i.e cost of money = interest rate is low. Lower money supply means money is expensive, i.e cost of money = interest rate is high.

Money Supply can be increased by increased due to :

• Increase in Legal Reserve Requirement : Higher reserve requirements reduce loanable funds & credit, money supply for public
• Increase in Marginal Requirement : Higher difference between loan & collateral value reduces credit creation & money supply
• Purchase of securities in OMO: Sale of securities in Open Market Operations reduces money supply in hands of people.