Which of the following is used by the Central Bank of Nigeria to control inflation?
Answer Details
The Central Bank of Nigeria (CBN) uses the discount rate to control inflation.
The discount rate, also known as the bank rate or policy rate, is the interest rate at which commercial banks can borrow from the central bank. When the CBN lowers the discount rate, commercial banks can borrow at a lower cost, which in turn leads to an increase in the money supply in the economy. This increase in the money supply leads to an increase in demand for goods and services, which can lead to an increase in prices (inflation).
Conversely, when the CBN raises the discount rate, borrowing becomes more expensive for commercial banks, leading to a decrease in the money supply and a decrease in demand for goods and services. This decrease in demand can lead to a decrease in prices (deflation).
Therefore, the CBN uses the discount rate as a monetary policy tool to control inflation. By adjusting the discount rate, the CBN can influence the cost of borrowing and ultimately the money supply in the economy, which affects the level of demand and therefore the level of prices.
Tariffs on imports and tax rates are fiscal policy tools that can also affect the level of demand and inflation in the economy. The exchange rate, on the other hand, is a monetary policy tool that can affect the competitiveness of exports and imports but may not directly impact inflation control.