Central Bank's Limit on Commercial Banks' Lending
Discuss whether or not a central bank should limit the amount commercial banks can lend to its customers.
Macroeconomic Factors and Policies
Frequently asked question
- Definition of central bank
- Importance of controlling commercial bank lending
II. Reasons why central bank should control commercial bank lending (up to ➡️5 marks)
- Unlimited loans could encourage people to borrow too much
- Borrowers may get into debt and default on loans
- Bank collapses could harm the economy
- Limiting lending could control aggregate demand and reduce inflation
- Limiting lending could improve the current account position on the balance of payments
III. Reasons why central bank should not control commercial bank lending (up to ➡️5 marks)
- Some people may not have sufficient purchasing power without loans
- Limiting loans to firms could cause unemployment and restrict economic growth
- MNCs may be discouraged from setting up in the country
- Limiting lending during a recession could lead to job losses
- Unlimited loans could lower interest rates and increase economic growth
- Balancing the benefits and drawbacks of controlling commercial bank lending
- Importance of considering the state of the economy and potential consequences for different groups of people.
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