Economic Awareness - Sectors of Indian Economy
If the Reserve Bank of India wants to reduce inflation caused by excess demand, which of the following actions is most appropriate?
If the Reserve Bank of India wants to reduce inflation caused by excess demand, which of the following actions is most appropriate?
medium Q15 of 15
Step-by-Step Solution
Step 1: Understand demand-pull inflation control
Demand-pull inflation occurs due to excess demand; controlling it requires reducing money supply or increasing borrowing costs.Step 2: Analyze RBI’s tools
Increasing the repo rate makes borrowing costlier, reducing demand and controlling inflation effectively.Step 3: Eliminate fiscal options
Increasing government expenditure or reducing taxes increases demand, worsening inflation; decreasing CRR increases money supply, not reduces it.Final Answer:
Increase the Repo Rate → Option AQuick Check:
Demand-pull inflation control = Increase Repo Rate ✅
Quick Trick: Higher repo rate reduces demand and inflation
Common Mistakes:
- Confusing decrease in CRR with inflation control; it increases money supply
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