Question

What is deflationary gap? Also explain the role of
a) Repo rate
b) Reverse repo rate in the above-mentioned situation​

Answer 1

a deficit in total disposable income relative to the current value of goods produced that is sufficient to cause a decline in prices and a lowering of production — compare inflationary gap.

• Repo rate refers to the rate at which the central bank lends to the commercial bank. In case of inflationary gap, the central bank would increase repo rate. An increase in the repo rate increases the cost of borrowings for the commercial banks. This discourages the demand for loans and borrowings.
• Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding.
• Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding.Role of repo rate: Repo rate relates to the loans offered by the RBI to the commercial banks not without collateral. During deficient demand or deflation repo rate is decreased. As a follow-up action, the commercial banks decrease the market rate of interest. This increses the demand for credit and thus deficient demand or deflation can be combated.

Answer 2

In case of inflationary gap, the central bank would increase repo rate. An increase in the repo rate increases the cost of borrowings for the commercial banks. This discourages the demand for loans and borrowings. Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding.