Arrange the sequence of events in the correct order relating to a quantitative tool used by the central bank during the times of inflation.
A. Hence the money supply in the economy decreases
B. As a result, loans taken by commercial banks become more expensive
C. The central bank increases the bank rate
D. This reduces the reserves held by the commercial banks
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → C, B, D, A
The bank rate is the rate at which the central bank gives loans to commercial banks. During inflation, the central bank raises this rate to cut the money supply. The steps follow one another like this:
(C) The central bank increases the bank rate — this is the first step. The central bank acts to control the rise in prices.
(B) As a result, loans taken by commercial banks become more expensive — banks now pay a higher rate on what they borrow from the central bank. So they borrow less.
(D) This reduces the reserves held by the commercial banks — with less borrowing, banks hold fewer reserves, so they can give fewer loans.
(A) Hence the money supply in the economy decreases — fewer loans mean fewer new deposits, so the money supply falls.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| – | – | – | 09-06 S3* 13-06 S1* 20-06 S1 | – |
* A similar question.
NCERT (2026-27): “3.4 Policy Tools to Control Money Supply …The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.” |