Question

Suppose that the central bank reduces the repo rate. What will happen in the AD-AS model?

(a) Investment decreases

(b) Aggregate demand increases

(c) Consumption increases

(d) Income decreases

(e) Prices increase

Answer 1

(b) Aggregate demand increases

The lower repo rates are intended to boost growth and improve the country's economic development. Consumers will borrow more from banks, bringing inflation under control. A drop in the repo rate may prompt banks to lower their lending rates; hence, increase in AD