(a) Define: (i) Building Society (2marks); (ii) Central Bank. (3marks) (b) Highlight any five instruments of the Central Bank in regulating the supply of mo...

Answer Details

(a)(i) Building society is a financial institution that accepts deposits and savings from members and grants them loans, chiefly mortgages, to build, buy or improve houses.

(a)(ii) Central bank is the apex financial institution of a country that issues the national currency, acts as banker to the government and to commercial banks, and controls and regulates the money supply and banking system.

(b) Five instruments the central bank uses to regulate the supply of money

• Open-market operations: buying government securities to increase the money supply, or selling them to reduce it.
• Bank (discount) rate: raising the rate at which it lends to banks makes borrowing dearer and contracts credit; lowering it expands credit.
• Cash-reserve ratio: raising the proportion of deposits banks must hold as reserves reduces their lending power, and vice versa.
• Special deposits: calling for extra frozen deposits from banks removes cash and curtails lending.
• Moral suasion and selective credit control: persuading or directing banks to expand or restrict lending to particular sectors.

(The liquidity ratio requirement is another acceptable instrument.)