Aggregate demand is total demand for final goods and services that all sectors of the economy are planning to buy at a given level of income during a given period of time. Aggregate demand is affected by actions of RBI. The central bank on 27th March, 2020 reduced the repo rate by a whopping 75 basis points, bringing it down to 4.4 per cent, as a response to the coronavirus-induced crisis. The repo rate thus fell to the lowest ever. Before this, it had hit the lowest point of 4.74% in April 2009 in the wake of the financial crisis of 2008. Cash reserve ratio or CRR was also cut by the RBI by 100 basis points and reduced to 3 per cent with effect from March 28. This unlocked Rs 1.37 lakh crore primary liquidity in the banking system. The reverse repo rate was also lowered by 90 basis points. This affects the aggregate demand in the economy.

Reduction in repo rate will lead to ____ in aggregate demand for goods and services.
Which of the following option suits best in the above blank?

Increase

The correct answer is option 1: Increase

A reduction in the repo rate leads to a decrease in the cost of borrowing for commercial banks. This encourages banks to borrow more from the central bank and, in turn, lend more to businesses and consumers. Increased lending typically results in more spending and investment, which boosts aggregate demand for goods and services.