Answer: (d) EXPLANATION: An increase in the Bank Rate refers to the Central Bank (RBI in India) raising its benchmark policy rate. This generally indicates that the Central Bank is adopting a tight or contractionary monetary policy stance. A tight money policy is followed to curb excess demand and control inflation in the economy. Tools used for tightening include increasing bank rates along with other rates like repo rate, reverse repo rate etc. that make borrowing expensive. Option A is incorrect because market interest rates typically follow an upward trend in response to higher bank rate signals. Option B is invalid since bank loans are not stopped. Option C incorrectly refers to an easy money/expansionary policy while bank rate hikes reflect tightening. Therefore, option D accurately states that a hike in bank rate indicates that the Central Bank is following a contractionary or tight money policy to control inflation by discouraging borrowing and spending.

Answer: (b) EXPLANATION: When demand for money increases while the supply remains unchanged, it leads to higher interest rates. Higher demand for money means people want to hold more cash balances. To make them cut spending and increase their money holdings, the interest rate (cost of money) needs to rise. On the other hand, unchanged or inelastic money supply cannot match this increased demand. The excess demand for money pushes the interest rates upward to reach equilibrium. Therefore, with the supply of money remaining fixed, a rise in demand for money leads to an increase in the rate of interest, rather than a fall in price level, decrease in interest rates or an increase in income and employment.

Answer: (c) EXPLANATION: Lower interest rates encourage more borrowing and spending from consumers on homes, cars etc. leading to higher consumption expenditure. Tax collection is dependent more on income growth. With lower rates leading to higher investments and GDP growth, tax collection can increase indirectly. Thus, there is no direct link between interest rate and tax collection. Lower interest rates mean cheaper capital for businesses. So, businesses are encouraged to borrow more and invest in new projects/factories etc. This increases investment expenditure. People tend to save less as they earn lower returns on savings when rates fall. Money is instead used for consumption or paying back debt. Lower interest rates directly stimulate higher business investments and capital expenditure as cost of money falls. This attracts investment in new capacities and projects.

Answer (d)

Answer: (c) EXPLANATION: Inflation control is the joint responsibility of both the central government as well as the RBI through coordinated fiscal and monetary policies. The RBI plays the lead role in regulating inflation via key monetary policy rates, reserve requirements and money supply management. Tightening money supply by decreasing circulation through reduced government spending and credit creates less liquidity for consumers to demand goods. This subsequently controls price rise. Expanding money supply and liquidity will only stoke aggregate demand much more rapidly than supply. This will further push up prices i.e., be inflationary.