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What is excess demand ? Explain the role of Reverse Reop Rate in removing it. |
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Answer» Solution :Excess Demand is the amount by which the aggregated demand exceeds aggregate SUPPLY at full employment level. It causes inflation. Reverse Rope Rate is the rate of interest paid by the central bank on deposits by commercial bank. Central Bank can reduce excess demand by raising the Reverse Repo Rate. When the rate is raised, it encourages the commercial banks to park their FUNDS with the central bank. This reduces lending capacity of the comercial banks. Lending by the commercial banks to public DECLINE LEADING to fall in aggregate demand. |
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