If the inflation in an economy is rising steadily, the Central Bank might _____
- A.decrease the repo rate
- B.increase the repo rate
- C.decrease the reverse repo rate
- D.keep the repo rate unchanged
Correct answer
Explanation
The correct answer is B, increase the repo rate. The repo rate is the rate at which the Reserve Bank lends short-term money to banks against government securities. When inflation keeps rising, the Reserve Bank raises this rate, so banks borrow less and charge more on their own loans, spending and demand cool down and prices rise more slowly. Such a step is called a dear money or tight monetary policy, and the decision is taken by the six-member Monetary Policy Committee, which has to keep retail inflation at four per cent within a band of two percentage points on either side. A is wrong because cutting the repo rate makes money cheaper and adds to demand, which is done to lift growth when inflation is low. C is wrong because a lower reverse repo rate makes it less attractive for banks to park money with the Reserve Bank, so more money stays in the market and inflation gets worse. D is wrong because leaving the rate unchanged does nothing about rising prices. Exam tip: inflation high – repo rate up; growth slow – repo rate down.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
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Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
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UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
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The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
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GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
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