Skip to content

NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis

The RBI raises the repo rate and simultaneously the government cuts its fiscal deficit through lower spending. Which is the most likely combined effect on aggregate demand and interest rate-sensitive sectors?

Aggregate demand falls and interest-sensitive sectors like housing and autos face pressure. A higher repo rate raises borrowing costs and reduced government spending lowers public demand; both are contractionary and reinforce each other rather than offset.

  1. AAggregate demand rises and real estate benefits
  2. BAggregate demand falls and interest-sensitive sectors such as housing and autos face pressureCorrect
  3. CAggregate demand is unchanged because the policies offset each other
  4. DAggregate demand rises because lower spending boosts private investment

Explanation

A repo hike is contractionary monetary policy, raising borrowing costs. Lower government spending is contractionary fiscal policy. Both reduce demand, so they reinforce rather than offset each other, hurting rate-sensitive sectors like housing and autos.

Did you get it right without looking?

One question tells you little. A timed set on Economic Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Economic AnalysisFree diagnostic mock

More Economic Analysis questions