If the inflation in an economy is rising steadily, the Central Bank might ______.
Show answer & explanation
Correct answer: C
Explanation
The correct answer is option 3 i.e. Increase the repo rate.
When inflation rises steadily, the Central Bank typically tightens monetary policy by increasing the repo rate (the rate at which it lends to commercial banks). This makes borrowing more expensive, reducing money supply and demand, thereby controlling inflation.
Other Options:
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Decrease the repo rate – This would encourage borrowing and spending, worsening inflation.
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Decrease the reverse repo rate – This would reduce the incentive for banks to park funds with the Central Bank, increasing liquidity and aggravating inflation.
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Keep the repo rate unchanged – Inaction would allow inflation to rise further without corrective measures.
Thus, increasing the repo rate is the most effective tool to combat rising inflation.