Question

What will be the effect of increase in the 'Repo Rate' on the money supply?

• A. Money supply will increase
• B. Money supply will decrease
• C. Money supply will remain same
• D. Money supply will initially increase and then it will decrease

Answer 1

The correct option is B Money supply will decrease

Repo rate is the rate at which central bank lends money to commercial banks in the event of shortfall of funds, an increase in repo rate makes it costly for businesses and industry to borrow money. This in turn slow down the investment and reduces the supply of money.