Arrange the following steps related to the correction of Excess Demand in the correct order :
(A) Increase in Bank Rate by RBI
(B) Problem of excess demand will be corrected
(C) Public will borrow less
(D) Decreases money supply
(E) Loans taken by commercial banks will become costlier/expensive
Choose the correct answer from the options given below :
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (E), (C), (D), (B)
Excess demand means that planned spending is more than the output at full employment, when all the factors of production are in use. The Reserve Bank of India (RBI) can correct it by making borrowing dearer.
(A) Increase in Bank Rate by RBI — the bank rate is the rate at which the RBI gives loans to commercial banks.
(E) Loans taken by commercial banks will become costlier/expensive — this follows directly, and banks pass the cost on to their own borrowers.
(C) Public will borrow less — loans now cost more.
(D) Decreases money supply — banks create less money when fewer loans are given.
(B) Problem of excess demand will be corrected — with less money, people and firms spend less.
NCERT (2026-27): “3.4 Policy Tools to Control Money Supply … The RBI controls the money supply in the economy in various ways. … The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.” |