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Explain the role of reverse repo rate in controlling money supply. |
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Answer» Reverse repo rate is the rate at which central bank of a country borrows money from commercial banks. Reverse repo rate is fixed by the central bank. To control the money supply, central bank makes changes in the reverse repo rate. To reduce money supply central bank will increase reverse repo rate. Increase in reverse repo rate motivates commercial banks to lend to central bank. Increase in reverse repo rate reduces availability of funds with commercial banks and supply of money is curtailed in the economy. Decrease in reverse repo rate will increase availability of funds with the commercial banks and supply of money increases in the economy. |
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