Question
The central bank of a country is concerned about the
rising inflation rate and wants to tighten monetary policy to control it. The central bank is considering various measures to reduce the money supply in the economy. Which of the following measures is the central bank most likely to take to reduce the money supply?Solution
Increasing the repo rate (the rate at which the central bank lends to commercial banks) will make borrowing more expensive for banks, leading to a decrease in lending and a reduction in the money supply. This is a common tool used by central banks to control inflation.
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