Read the following text carefully : "With an objective to improve the growth momentum by stimulating domestic private consumption and investment, the Reserve Bank of India (RBI) announced a reduction in Cash Reserve Ratio (CRR) by 100 basis points (1%)." Based on the above text and common understanding, answer the following questions : (i) Explain the likely cause behind the step taken by the Reserve Bank of India (RBI). (ii) Briefly explain the impact of the step taken by the Reserve Bank of India (RBI) on the Aggregate Demand (AD).

Question

Accepted Answer

Based on the text about RBI announcing reduction in Repo Rate:

1. This is an expansionary monetary policy
2. Aimed at stimulating economic growth
3. Reduction in Repo Rate decreases cost of borrowing
4. Banks will reduce their lending rates
5. Borrowing becomes cheaper
6. Consumption and investment increase
7. Aggregate demand increases
8. Money supply increases
9. Economic growth is stimulated

The reduction in Repo Rate will have a positive impact on the economy through:
- Lower interest rates
- Increased credit availability
- Higher consumption
- More investment
- Economic recovery