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Consider the following statements.
The RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every four years.
  • The Monetary Policy Framework aims at setting the repo rate based on an assessment of the current and evolving macroeconomic situation.
  • Repo rate changes transmit through the money market to the entire financial system, which in turn, influences aggregate demand.
    Which of the above statements is/are correct?
    • a)
      1, 2
    • b)
      1, 3
    • c)
      2, 3
    • d)
      3 only
    Correct answer is option 'C'. Can you explain this answer?
    Most Upvoted Answer
    Consider the following statements. The RBI Act provides for the ...
    The correct option is (C) 2, 3.

    Explanation:

    - The first statement is incorrect. The RBI Act provides for the inflation target to be set by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), not the Government of India. The MPC is responsible for setting the policy interest rate (repo rate) required to achieve the inflation target.
    - The second statement is correct. The Monetary Policy Framework (MPF) of the RBI aims at setting the repo rate based on an assessment of the current and evolving macroeconomic situation. The objective of the MPF is to maintain price stability while keeping in mind the objective of growth.
    - The third statement is also correct. Repo rate changes transmit through the money market to the entire financial system, which in turn, influences aggregate demand. When the repo rate is reduced, it becomes cheaper for banks to borrow from the RBI, which leads to an increase in the money supply. This, in turn, reduces the cost of borrowing for consumers and businesses, leading to an increase in demand for goods and services.

    Hence, option (C) 2, 3 is the correct answer.
    Free Test
    Community Answer
    Consider the following statements. The RBI Act provides for the ...
    Explanation:

    The given statements are related to the Monetary Policy Framework of the Reserve Bank of India (RBI). Let's discuss each statement in detail:

    1. The RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every four years.

    - The RBI Act, 1934 was amended in 2016 to provide for a statutory and institutionalized framework for inflation targeting in India.
    - As per the framework, the Government of India, in consultation with the Reserve Bank, sets the inflation target once in every five years.
    - The current target is to maintain retail inflation at 4% (with a range of +/- 2%) over the medium term.

    2. The Monetary Policy Framework aims at setting the repo rate based on an assessment of the current and evolving macroeconomic situation.

    - The Monetary Policy Framework was introduced in 2016, along with the inflation targeting framework.
    - The framework aims to maintain price stability, while keeping in mind the objective of growth.
    - The repo rate is the rate at which the RBI lends money to commercial banks. It is the key policy rate that influences the cost of borrowing and lending in the economy.
    - The RBI's Monetary Policy Committee (MPC) decides the repo rate based on an assessment of the current and evolving macroeconomic situation, including inflation and growth indicators.

    3. Repo rate changes transmit through the money market to the entire financial system, which in turn, influences aggregate demand.

    - When the RBI changes the repo rate, it affects the cost of borrowing and lending in the economy.
    - A reduction in the repo rate makes borrowing cheaper for banks, which in turn, makes loans cheaper for customers. This can increase spending and investment in the economy, leading to higher aggregate demand.
    - Similarly, an increase in the repo rate makes borrowing more expensive for banks, which can lead to a decrease in spending and investment, leading to lower aggregate demand.

    Therefore, statement 2 and 3 are correct. Statement 1 is incorrect as the inflation target is set once in every five years, not four years. The correct answer is option C (2, 3).
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