The term 'Dear Money' refers to

Correct — C, (c) High rate of interest.

The term rests on a single idea: MONEY HAS A PRICE, AND THAT PRICE IS THE RATE OF INTEREST. To borrow money is to buy the use of it for a period, and what the borrower pays for that use is interest. So when interest rates are high, money is expensive — DEAR, in the older English sense of costly rather than beloved. When rates are low, money is CHEAP.

That is the whole of it, and everything else follows.

A DEAR MONEY POLICY is a contractionary monetary policy: the central bank raises the policy rate, raises reserve requirements, or sells securities in the open market, and the effect is to make credit costlier and scarcer. It is used to restrain an overheating economy, to curb inflation, or to defend an exchange rate. Its costs are the other side of the same coin — investment that would have been undertaken at a lower rate is not undertaken, and output and employment grow more slowly.

A CHEAP MONEY POLICY is the opposite: low policy rates and easier credit, used to stimulate investment and employment when demand is deficient.

Two things about the phrasing are worth noticing, because they are how the item is made difficult. First, 'dear' is used in a sense that is now largely confined to the phrase itself — cost, not affection — and a candidate meeting the term for the first time has nothing in ordinary speech to go on. Second, the answer is deliberately GENERAL: it is the rate of interest as such, not the rate on any particular kind of lending. Two of the three wrong options are about housing loans, and the item is partly a test of whether the candidate reads 'money' as a market-wide magnitude or as the cost of one loan product.

'Dear Money' is printed in single quotes with both words capitalised, and the stem ends without punctuation.

Why the others are wrong

• (a)Low rate of interest on housing loans — Wrong twice over. It is the wrong DIRECTION — a low rate of interest is cheap money, which is the opposite condition to the one named — and it is the wrong SCOPE, since dear or cheap money describes the general level of the rate of interest in the economy rather than the rate charged on a single class of loan. Housing finance is certainly sensitive to the general rate, which is why home loan rates are what most people notice when policy changes; but the term names the underlying condition, not the visible symptom in one market.
• (b)Value of money at the recession stage — This has the right instinct that 'dear' concerns the value of money, and then puts it in the wrong place. In a recession, demand for credit is weak and central banks typically cut rates, so money in a recession is characteristically CHEAP rather than dear. The option also conflates two different senses of the value of money. Its INTERNAL value is its purchasing power over goods, which is the inverse of the price level and is what inflation erodes; its price in the credit market is the rate of interest. 'Dear money' refers to the second, not the first. During deflation money gains purchasing power while interest rates are usually being pushed down, so the two senses can move in opposite directions at once.
• (d)Savings gained due to decrease in rate of interest on housing loans — This describes a household's saving on its interest bill when housing loan rates fall — a real and welcome thing, and again a consequence of CHEAP money, which is the opposite of the term asked about. It is the furthest of the four options from the answer, because it is not a description of a monetary condition at all but of a benefit accruing to one class of borrower when money is cheap. Its presence beside option (a) is what makes the point that half the option set has been built around housing finance: an examiner testing whether the candidate generalises from a familiar loan product to the market as a whole.

THE RATE OF INTEREST AS THE PRICE OF MONEY is the organising idea, and a small vocabulary hangs from it.

DEAR MONEY — a high rate of interest; credit costly and hard to get. A dear money policy is contractionary and is used against inflation. CHEAP MONEY — a low rate of interest; credit cheap and plentiful. A cheap money policy is expansionary and is used against unemployment and deficient demand. TIGHT MONEY and EASY MONEY are used as near-synonyms for the two conditions, with the emphasis on availability rather than price.

HOW A CENTRAL BANK MAKES MONEY DEAR. In India the instruments are the POLICY REPO RATE, at which the Reserve Bank lends to commercial banks against securities; the CASH RESERVE RATIO, the proportion of deposits banks must keep with the Reserve Bank in cash; the STATUTORY LIQUIDITY RATIO, the proportion they must hold in specified liquid assets; and OPEN MARKET OPERATIONS, the purchase and sale of government securities. Raising the first three or selling under the fourth makes money dearer.

WHAT DEAR MONEY DOES. Higher rates raise the cost of capital, so investment projects at the margin are abandoned; they raise the cost of holding stock, so inventories are run down; they raise the return on saving, so consumption is deferred; and they attract capital from abroad, which tends to strengthen the currency. The result is lower aggregate demand and, if the policy works, lower inflation — bought at the cost of slower growth.

THE DISTINCTION TO KEEP CLEAR is between two senses of the value of money. The INTERNAL VALUE of money is its purchasing power over goods and services, and it falls when prices rise; this is the sense in which inflation makes money less valuable. The PRICE OF MONEY IN THE CREDIT MARKET is the rate of interest, and it is what 'dear' and 'cheap' refer to. Confusing them is the commonest error in this area, and option (b) is built out of that confusion.

The historical usage is worth a note: the phrase 'cheap money policy' is associated with the low interest rates of the 1930s and with the argument that monetary ease alone cannot revive investment if expectations are bad — the point behind the image of pushing on a string.

Key facts

• 'Dear money' means a high rate of interest — money is dear in the sense of costly, because the rate of interest is the price paid for the use of money.
• A dear money policy is contractionary: higher policy rates, higher reserve requirements or open market sales, used to restrain demand and curb inflation.
• A cheap money policy is expansionary: low rates and easier credit, used to stimulate investment and employment.
• The Reserve Bank of India's instruments include the policy repo rate, the cash reserve ratio, the statutory liquidity ratio and open market operations.
• Dear money raises the cost of capital and of holding stock, raises the return on saving, and tends to attract capital from abroad and strengthen the currency.
• The INTERNAL value of money is its purchasing power over goods, which inflation erodes; the price of money in the credit market is the rate of interest. 'Dear' refers to the second.
• In a recession, credit demand is weak and policy rates are usually cut, so money in a recession is characteristically cheap rather than dear.

Common traps

• Reading 'dear' in its affectionate sense. It is the older meaning of costly, and the phrase survives almost only in this use.
• Attaching the term to a particular loan product. It describes the general level of the rate of interest, not the rate on housing finance.
• Associating dear money with recession. In a recession, rates are typically cut and money becomes cheap.
• Confusing the price of money in the credit market with the purchasing power of money over goods. Only the first is what 'dear money' names.

• practice — not a real PYQ

  A dear money policy is generally adopted by a central bank in order to

  • (a)stimulate investment and employment
  • (b)control inflationary pressure in the economy
  • (c)increase the money supply during a recession
  • (d)reduce the external value of the currency

  Answer(b) control inflationary pressure in the economy — a dear money policy raises the cost of credit and reduces its availability, which restrains aggregate demand. Options (a) and (c) describe a cheap money policy, and higher interest rates tend to attract capital and STRENGTHEN rather than weaken the currency.

• practice — not a real PYQ

  An increase in the cash reserve ratio by the Reserve Bank of India will, other things being equal,

  • (a)increase the lending capacity of commercial banks
  • (b)reduce the lending capacity of commercial banks and tighten credit
  • (c)leave the money supply unchanged
  • (d)reduce the rate of interest in the economy

  Answer(b) reduce the lending capacity of commercial banks and tighten credit — a higher cash reserve ratio requires banks to keep a larger proportion of their deposits with the Reserve Bank, leaving less to lend. Less lendable money and dearer credit is precisely what a dear money policy is.