Banking sector plays vital role in the capitalist economies all over the world e

Question

Banking sector plays vital role in the capitalist economies all over the world especially this role also gets significance in the developing countries like Sri Lanka Policies of Central Bank, imposed on the commercial bank and financial sector, are considered as one of the key factors to boost the economy and control the inflation "If all commercial banks in Sri Lanka increase the small loans limit to Rs. 200,000 for general public at very low interest rate along with relaxed terms and conditions. Such loans will be used only for personal use and luxury items. What will be the effect of tins activity of commercial banks 011 the money supply, inflation. Balance of payment (BOP) and real growth?" You are required to answer/comments in the following table, which show only which component increases or decreases or both situations are possible"

Explanation / Answer

In my opinion; Money Supply >>> Increase Inflation >>>>>>>> Increase BoP >>>>>>>>>>>> May increase or decrease Real Growth >>>> May increase or decrease

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