Which of the following is not an instrument of selective credit control?
-
- Margin requirements
- Open market operation
- Credit rationing
- None of the above
Correct Answer: Open Market Operation
Answer explanation
Open market operation is not an instrument of selective credit control. Central banks use open market operations as a monetary policy tool to regulate the money supply and influence interest rates, not to selectively control credit.
As part of their monetary policy objectives, central banks buy and sell government securities to control the money supply in circulation. Central banks can influence interest rates and stabilize the economy by adjusting the money supply. This tool is not used to selectively control credit.
Why the other options are not correct
a. Margin requirements:
In order to buy securities on margin, investors must contribute a certain amount of their own money. A margin requirement applies to investors who want to borrow money from brokers to purchase securities.
By imposing higher margin requirements, central banks can control excessive credit expansion and prevent asset bubbles by limiting the amount of money borrowed for speculative purposes.
Indirectly, central banks use margin requirements to influence investors’ borrowing behavior. As a result, it does not qualify as an instrument of selective credit control because it is not a targeted measure that allows central banks to control credit flows to specific sectors or borrowers.
c. Credit rationing:
Credit rationing is a selective credit control measure used by central banks to limit the amount of credit that banks can extend to specific sectors or borrowers. Inflationary conditions or overheating of specific sectors of the economy are common reasons for using this measure. It is possible for central banks to direct credit flow to priority sectors and prevent an excessive amount of debt from building up by rationing credit.
By using credit quotas or limits, central banks can influence the allocation of credit without affecting the entire economy. Credit rationing is a direct and targeted approach to controlling credit flows to specific areas. As a result, credit rationing is an instrument of selective credit control.
d. None of the above:
This option is incorrect because two of the options, (a) Margin requirements and (c) Credit rationing, are indeed instruments of selective credit control. Because open market operations do not provide direct control over credits or borrowers, they are the correct answer.
Conclusion
A central bank’s selective credit control is an essential part of monetary policy in order to regulate credit flows within an economy. In response to the question, the correct answer is (b) Open market operation, as it is not a tool specifically designed for selective credit control. A central bank can, however, influence the allocation and availability of credit to certain sectors or borrowers by imposing margin requirements and credit rationing.
By utilizing these tools strategically, central banks can maintain financial stability, control inflation, and promote sustainable economic growth. The ability to employ selective credit control effectively allows policymakers to steer the economy in a desired direction.
Computers in Office Management- Office Equipment and Their Uses | Office Management
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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