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CA Foundation · Business Economics · Money Market

Which of the following is a function of the money market that directly helps the central bank in implementing monetary policy?

The money market gives the central bank a platform where its liquidity operations influence short-term interest rates, so policy signals are transmitted to the wider economy. It does not set share prices, collect taxes or guarantee bond returns.

  1. AIt provides a platform through which the central bank's liquidity operations influence short-term interest ratesCorrect
  2. BIt allows the central bank to set the prices of company shares
  3. CIt enables the central bank to collect income tax from borrowers
  4. DIt guarantees a fixed return on all long-term bonds

Explanation

The money market is the channel through which RBI's liquidity operations, such as repo and reverse repo, affect short-term rates and then the wider economy. The other options describe activities unrelated to the money market or to monetary policy transmission.

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