WBCS.LIVE practice question

Which of the following would have inflationary effect on the economy? 1. RBI releasing new bonds in the market 2. RBI decreasing the SLR 3. RBI increasing the Bank Rate 4. Abolition of CRR

Solve this multiple-choice question and check the correct answer with its explanation below.

Answer options

  1. 1, 2 and 3
  2. 1 and 4 only
  3. 2 and 4 only
  4. 3 and 4 only

Correct answer and explanation

Correct answer: 2 and 4 only

Explanation: Inflationary effects occur when money supply increases in the economy. RBI decreasing SLR and abolition of CRR both release more funds to banks, leading to higher lending and demand, hence inflation. 📚 Other Information: ▪️ SLR (Statutory Liquidity Ratio): Portion of deposits banks must keep in liquid assets. ▪️ CRR (Cash Reserve Ratio): Cash that banks must deposit with RBI. ▪️ Lowering these increases liquidity in the economy. ▪️ On the other hand, increasing Bank Rate contracts money supply. ▪️ Thus, Option C (2 and 4) is correct.