The central bank Can reduce the ability of commercial banks to give out loans by
Answer Details
The central bank can reduce the ability of commercial banks to give out loans in a few ways, but one simple way is by raising the bank rates. When the central bank raises the interest rates, it becomes more expensive for commercial banks to borrow money from the central bank. Consequently, the commercial banks will also increase the interest rates for their customers to make up for the extra cost of borrowing from the central bank. As a result, fewer people and businesses will want to borrow money, which means that the commercial banks will give out fewer loans.
Another way the central bank can reduce the ability of commercial banks to give out loans is by reducing the special deposits. When the central bank reduces the special deposits that commercial banks have to keep with them, the banks will have less money to lend out to their customers, which means that they will give out fewer loans.
Similarly, the central bank can also reduce the liquidity ratio, which is the percentage of the commercial banks' assets that they have to keep as liquid cash. When the central bank reduces the liquidity ratio, the banks will have to keep less money as liquid cash, which means that they will have less money to lend out to their customers.
Issuing more currency, on the other hand, can actually increase the amount of money that commercial banks have available to lend out. Therefore, it would not reduce the ability of commercial banks to give out loans.