Answer to Question #87570 in Macroeconomics for nhlanhla Faith Nkomo

Question

Using the Keynesian transmission mechanism, illustrate and explain the effect of an decrease of repo rate in the economy

Answer 1

Increase in Repo Rate will affect lending rates and deposits offered by banks. However, it may not have an immediate effect. Banks may analyse their liquidity position and cost of funds before increasing the deposit rates and the lending rates. After analysing the cost of funds and liquidity position, banks may begin to pass on their interest rate burden to its end customer in the form of elevated lending rates. That means higher equated monthly instalment for existing borrowers and higher rate of credit for new borrowers. Home loans and other floating rate loans get majorly affected due to rate change. Higher lending rates may lead to a slowdown of the lending business for the banking sector, which will have an impact on their profitability. Post analysis of liquidity position, banks may also hike the rate of bank deposit offered to customers to attract more inflow of funds into the banking system.

Source:

https://www.paisabazaar.com/rbi/repo-rate-and-reverse-repo-rate/amp/