Which of the following is used by the central bank to control the rate of interest

A. bill of exchange
B. banker’s order
C. fixed deposit account
D. open market operation

Correct Answer:

Option D – open market operation

Explanation

The open market operation refers to when the central bank buys or sells government securities to the public. This is done to control the flow of money in the country as well as control the rates of interest.

When there is too much money in circulation in the economy, the government sells securities, and increase the interest rates on those securities, to encourage savings and investments while discouraging borrowing. When it wants to increase the money in circulation, it buys buys from financial institutions, reduces interest rates to ecourage borrowing, thereby releasing more money into the economy.