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 :

C, B, A, D

The correct answer is option (2) : C, B, A, D

Explanation :

• C. The central bank increases the bank rate: To combat inflation, the central bank may decide to raise the bank rate (or repo rate), which is the interest rate at which commercial banks borrow from the central bank.

• B. As a result, loans taken by commercial banks become more expensive: When the bank rate increases, borrowing costs for commercial banks rise, leading to more expensive loans for individuals and businesses.

• D. This reduces the reserves held by the commercial banks: Higher borrowing costs mean that commercial banks may borrow less from the central bank, which reduces their reserves.

• A. Hence the money supply in the economy decreases: With reduced reserves and higher borrowing costs, commercial banks will have less money to lend out, leading to a decrease in the overall money supply in the economy.