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    Question

    An increase in the Repo Rate by the Reserve Bank of

    India is likely to have the following impacts on the economy?┬а 1. Increase in the cost of borrowing for commercial banks.┬а 2. Decrease in the lending rates offered by commercial banks┬а 3. Potential decrease in aggregate demand.┬а 4. Increased incentive for commercial banks to borrow from the RBI.┬а Select the correct answer using the codes below:┬а
    A 1 and 2 only Correct Answer Incorrect Answer
    B 2 and 4 only Correct Answer Incorrect Answer
    C 1 and 3 only Correct Answer Incorrect Answer
    D 3 and 4 only Correct Answer Incorrect Answer

    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.┬а Statement 1 is correct: A higher repo rate makes borrowing costlier for commercial banks.┬а Statement 2 is not correct: Lending rates are likely to increase, not decrease.┬а Statement 3 is correct: Higher interest rates tend to reduce borrowing and spending, which can reduce aggregate demand.┬а Statement 4 is not correct: A higher repo rate discourages banks from borrowing due to increased cost.

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