WAEC Economics 2010 Theory — Question 21

Model answer

Ways by which central banks control commercial banks include: (i) Use of cash reserve ratio: reserve ratio is the proportional of customers' deposits commercial banks are required to keep with the central bank; they use this to regulate the amount available for a commercial bank to give out as loans. (ii) Special directives: this involves the direct giving of instructions to commercial banks on the type of loans they should give and who they should give it to. (iii) Credit ceiling: this is the act of setting limits on the amount of loans the banks are allowed to give out. (iv) Open market operations: this involves the buying and selling of securities in the open market to the general public who draw the cheque for these transactions on their commercial banks.