CMA Foundation · Fundamentals of Business Economics and Management · Economic and Business Environment
The Reserve Bank of India wants to curb high inflation caused by excess demand in the economy. Which combination of measures is consistent with this aim?
A higher repo rate with a higher CRR is consistent with curbing excess-demand inflation. Both measures make credit costlier or scarcer, reducing money supply and spending. Lowering either rate or ratio would expand credit and add to demand pressure, so the other combinations do not fit a tightening stance.
- ALower repo rate and lower CRR
- BHigher repo rate and higher CRRCorrect
- CLower repo rate and higher CRR
- DHigher repo rate and lower CRR
Explanation
To curb demand-driven inflation the RBI follows tight monetary policy: raising the repo rate makes borrowing costlier and raising CRR reduces funds banks can lend. Both reduce credit and demand. Lowering either would expand credit, and mixed combinations do not consistently tighten policy.
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