What role does the Reserve Bank of India (RBI) play in controlling inflation?
Practice Questions
Q1
What role does the Reserve Bank of India (RBI) play in controlling inflation?
Setting fiscal policy
Regulating stock markets
Adjusting interest rates
Controlling foreign exchange rates
Questions & Step-by-Step Solutions
What role does the Reserve Bank of India (RBI) play in controlling inflation?
Step 1: Understand what inflation is. Inflation means that prices of goods and services are rising.
Step 2: Know that the Reserve Bank of India (RBI) is the central bank of India responsible for managing the economy.
Step 3: Learn that one of the main tools the RBI uses to control inflation is adjusting interest rates.
Step 4: When the RBI raises interest rates, borrowing money becomes more expensive. This means people and businesses will borrow and spend less.
Step 5: With less spending, demand for goods and services decreases, which can help lower prices and control inflation.
Step 6: Conversely, if the RBI lowers interest rates, borrowing becomes cheaper, encouraging more spending, which can increase demand and potentially raise prices.
Step 7: The RBI monitors inflation and adjusts interest rates as needed to keep inflation within a target range.
