Identify the monetary measure being referred to each of the following and discuss whether the tool would be used during a situation of excess demand or deficient demand.
Discourage commercial banks to park their surplus funds with the Reserve Bank of India (RBI).
Identify the monetary measure being referred to each of the following and discuss whether the tool would be used during a situation of excess demand or deficient demand.
Discourage commercial banks to park their surplus funds with the Reserve Bank of India (RBI).
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Solution and Explanation
Reverse repo rate is the rate at which the RBI borrows money from commercial banks. Banks park their surplus funds with the RBI and earn this rate.
To discourage banks from parking surplus funds with the RBI, the RBI lowers this rate. So the tool is the Reverse Repo Rate.
Step 2: See how it works:
A lower reverse repo rate makes parking funds with the RBI less rewarding.
Banks then prefer to lend the money to businesses and households. Their lending capacity and the money supply rise.
Step 3: Decide the demand situation:
More lending raises spending and aggregate demand.
So this tool is used in a situation of deficient demand. In excess demand the RBI would raise the reverse repo rate.
Final Answer:
The tool is the Reverse Repo Rate (lowered), used in deficient demand. \[ \boxed{\text{Reverse repo rate; deficient demand}} \]
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