When the central bank in an economy raises the repo rate it encourages commercial banks to reduce their lending, thereby tending to reduce the money supply.

Question

Quizplus · Accepted Answer

When the central bank raises the repo rate, it becomes more expensive for commercial banks to borrow money from the central bank. In turn, this encourages commercial banks to reduce their lending, as they will want to maintain higher levels of reserves to avoid borrowing from the more expensive central bank. With reduced lending, there is less money being created and circulated in the economy, and hence the money supply tends to decrease.

When the Central Bank in an Economy Raises the Repo