Q. Which one of the following best describes the relationship between a high repo rate and inflation?
Red Book
Red Book

[A] High repo rate leads to low inflation

[B] High repo rate leads to high inflation

[C] High repo rate has no effect on inflation

[D] High repo rate leads to deflation

Answer: A
Notes:

Explanation – A high repo rate makes borrowing more expensive for commercial banks, which in turn pass on these higher costs to consumers and businesses. This leads to reduced spending and investment, thereby decreasing the money supply in the economy. As a result, inflationary pressures are reduced.

Source: The Hindu


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