(a) Read the following information carefully : "The Monetary Policy Committee (MPC) of the Reserve Bank of Ind

Question 36 of 67

Q. (a) Read the following information carefully : "The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), recently increased the Repo Rate by 50 basis points. The Rate stands today at 5\cdot40%, whereas Reverse Repo Rate was left unchanged at 3\cdot35%." Answer the following questions :

(i) Identify the nature of the two monetary policy measures mentioned in the above text.

(ii) Elaborate the likely economic rationale behind the increase in Repo Rate by the Monetary Policy Committee.

(OR)

(b) Suppose an imaginary economy is facing a situation of deficient demand in the short run time period. Discuss briefly, the probable impacts of the same on the economy.

Tripura TbseCBSE Class XII Board 2023Subjective· 4mImportance★★★★★

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Part (a)Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

Think of a seesaw. On one side sits everything people, firms, and the government want to buy. On the other side sits everything firms produce. When the seesaw is perfectly level — when total spending exactly matches total output — the economy is in equilibrium. That's the core idea.

But why should you care? Because when the seesaw tilts, real things happen. If spending exceeds output, prices rise (inflation). If output exceeds spending, factories shut down and people lose jobs. Equilibrium is the sweet spot where neither happens.

The Precise Meaning

In macroeconomics, Aggregate Demand (AD) is the total planned spending on final goods and services in an economy during a given period. Aggregate Supply (AS) is the total output firms plan to produce.

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

This is the AD identity from your NCERT textbook. It tells you that total spending in the economy comes from four sources: households, firms, government, and foreigners (net of what we buy from them).

How Equilibrium Actually Works

Imagine a simple economy with only households and firms. Households earn income $Y$ from firms. They spend part of it on consumption $C$ and save the rest $S$ . Firms produce output and also invest $I$ (buying machines, building factories).

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

In equilibrium, planned savings must equal planned investment. This is the Keynesian cross condition. If people save more than firms invest, total spending falls short of output — inventories pile up, firms cut production, and income falls until savings and investment match again.

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

Part (b)Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

The Precise Meaning

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

How Equilibrium Actually Works

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

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Part (a): Repo & reverse repo are quantitative instruments; the repo hike is contractionary; the rationale is to curb inflation by raising credit costs and lowering aggregate demand.
Part (b): Deficient demand → deflationary gap → falling output, income and employment, rising involuntary unemployment, and downward pressure on prices.

Part (a)

Nature of the two measures. The Repo Rate is the rate at which the RBI lends short-term funds to commercial banks; the Reverse Repo Rate is the rate at which the RBI absorbs banks' surplus funds. Both are quantitative (general) instruments of monetary policy. An increase in the Repo Rate (to 5.40%) is a contractionary / tight measure — it signals the RBI's intent to reduce money supply — while the Reverse Repo Rate was left unchanged at 3.35%.
Economic rationale for raising the Repo Rate. The most likely reason is to control inflation and rein in excess demand:

A higher repo rate makes borrowing from the RBI costlier for commercial banks.
Banks pass this on as higher lending rates on home, car, personal and business loans.
Costlier credit discourages consumption and investment spending.
Aggregate demand falls, reducing the upward pressure on prices. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

TBSE Tripura Higher Secondary (+2 Stage) Examination (Commerce) 2026Set ANNUAL1 markMCQ
$Q. The 'Mahatma Gandhi National Rural Employment Guarantee Act' (MGNREGA) scheme provides ______.$
(a) Wage-based employment
(b) Self-employment
(c) Permanent or regular salaried employment
(d) All of the above
›Reveal solutionSolution

MGNREGA guarantees wage employment (manual work paid a daily wage), not self-employment or permanent salaried jobs.

The Mahatma Gandhi National Rural Employment Guarantee Act, 2005 gives every rural household a legal right to demand up to 100 days of unskilled manual work per year on public works (roads, water conservation, land development, etc.), and the worker is paid a statutory daily wage if work is not provided within 15 days. It is therefore wage-based employment — it does not set anyone up in their own enterprise (self-employ …

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TBSE Tripura Higher Secondary (+2 Stage) Examination (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Which of the following is responsible for an increase in aggregate demand?$
(a) Decrease in imports
(b) Increase in investment expenditure
(c) Increase in government expenditure
(d) All of the above
›Reveal solutionSolution
Aggregate demand has four components (consumption, investment, government spending, net exports), and all three listed changes raise one of these components — so AD rises in every case.

In an open economy, AD = C + I + G + (X − M). Each option affects a different component:

A decrease in imports (M) raises net exports (X − M), directly raising AD.

An increase in investment expenditure (I) by firms directly adds to AD. …
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Q.(a) Read the following information carefully : "The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), recently increased the Repo Rate by 50 basis points. The Rate stands today at 5·40%, whereas Reverse Repo Rate was left unchanged at 3·35%." Answer the following questions :

Part (a)

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