How inflation and deflation is corrected through bank rate?
Dear student,
Bank rate refers to the rate at which the central bank provides loans to the commercial banks.
In case of inflation the central bank raises the bank rate. This increases the cost of borrowing for the commercial banks. This in turn discourages the demand for loans and credit in the market. This leads to fall in the money supply and prices.
The opposite is the situation in case of deflation where the central bank would reduce the bank rate.
Bank rate refers to the rate at which the central bank provides loans to the commercial banks.
In case of inflation the central bank raises the bank rate. This increases the cost of borrowing for the commercial banks. This in turn discourages the demand for loans and credit in the market. This leads to fall in the money supply and prices.
The opposite is the situation in case of deflation where the central bank would reduce the bank rate.