Question/Description
Banking sector plays vital role in the capitalist economies all over the world especially this role also gets significance in the developing countries like Pakistan. Policies of Central Bank, imposed on the commercial bank and financial sector, are considered as one of the key factors to boost the economy and control the inflation.
“If all commercial banks in Pakistan increase the small loans limit to Rs. 200,000 for general public at very low interest rate along with relaxed terms and conditions. Such loans will be used only for personal use and luxury items. What will be the effect of this activity of commercial banks on the money supply, inflation, Balance of payment (BOP) and real growth?”
You are required to answer/comments in the following table, which show only which component increases or decreases or both situations are possible”
Banking sector plays vital role in the capitalist economies all over the world especially this role also gets significance in the developing countries like Pakistan. Policies of Central Bank, imposed on the commercial bank and financial sector, are considered as one of the key factors to boost the economy and control the inflation.
“If all commercial banks in Pakistan increase the small loans limit to Rs. 200,000 for general public at very low interest rate along with relaxed terms and conditions. Such loans will be used only for personal use and luxury items. What will be the effect of this activity of commercial banks on the money supply, inflation, Balance of payment (BOP) and real growth?”
You are required to answer/comments in the following table, which show only which component increases or decreases or both situations are possible”
Idea Solution:-
1-Money supply (INCREASE)
2-Inflation WHEN MONEY SUPPLY EXCESS AVAILABLE IN MARKET THEN INFLATION WILL BE INCREASED SO (INCREASE)
3-Balance of payment (BOP) BOP WILL BE MAY DECREASED OR INCREASE DUE TO EXCESS MONEY OF SUPPLY (MAY DECREASED OR INCREASED )
4-Real growth real growth will be decreased due to personal and luxury loans. (Decreased)
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