Economics · Monetary Policy and Inflation
In a scenario where a nation experiences a sharp rise in the Consumer Price Index (CPI) while GDP growth remains steady, the central bank increases the Repo Rate to curb liquidity while the government increases capital expenditure on infrastructure. How will these combined actions likely affect the economy in the short term?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The Repo Rate increase will have no effect in a services-led economy.
- 2The GDP growth rate will immediately double because of the infrastructure spending.
- 3Inflation will rise further because government spending always causes higher prices regardless of central bank actions.
- 4Inflation will decrease, but the cost of borrowing for businesses will increase, potentially slowing down private investment.✓
Correct answer
Inflation will decrease, but the cost of borrowing for businesses will increase, potentially slowing down private investment.
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