An increase in the Repo Rate by the Reserve Bank of

Solution

Repo Rate: The Repo Rate is the interest rate at which the RBI lends short-term funds to commercial banks, against government securities as collateral. It helps in controlling short-term liquidity in the financial system.  Statement 1 is correct: A higher repo rate makes borrowing costlier for commercial banks.  Statement 2 is not correct: Lending rates are likely to increase, not decrease.  Statement 3 is correct: Higher interest rates tend to reduce borrowing and spending, which can reduce aggregate demand.  Statement 4 is not correct: A higher repo rate discourages banks from borrowing due to increased cost.