Question : Assertion (A): To gear up the decreasing demand in the economy, RBI recently reduced Repo Rate and Bank Rate.
Reason(R): By decreasing the repo rate and bank rate the commercial banks reduce the rate of interest rate and thus it leads to an increase in demand for credit because of which more money flows into the system, purchasing power of people increases. Thus, aggregate demand rises and deficient demand is corrected.
Option 1: Both Assertion (A) and Reason(R) are true and Reason (R) is the correct explanation of Assertion (A)
Option 2: Both Assertion (A) and Reason(R) are true, but Reason (R) is not the correct explanation of Assertion (A)
Option 3: Assertion (A) is true, but Reason (R) is false.
Option 4: Assertion (A) Is false, but Reason (R) is true.
Correct Answer: Both Assertion (A) and Reason(R) are true and Reason (R) is the correct explanation of Assertion (A)
Solution : The correct answer is (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
The assertion is true as the central bank often uses monetary policy tools like Repo Rate and Bank Rate to influence borrowing costs and stimulate economic activity.
The reason provided explains the mechanism behind this action. When the central bank decreases the Repo Rate and Bank Rate, it effectively reduces the rate of interest, making borrowing cheaper for commercial banks. This, in turn, leads to an increase in demand for credit, as it becomes more affordable. As more money flows into the system and purchasing power of people increases, aggregate demand rises, helping to correct deficient demand.
Therefore, both the assertion and reason are true, and the reason correctly explains the rationale behind the action taken by RBI.




