Excess demand exists when aggregate demand exceeds aggregate supply at full employment level. Excess demand gives rise to inflationary. This situation leads to inflationary tendencies or rise in prices.
Role of Reverse repo Rate : Reverse Repo rate is the rate at which the RBI borrows money from commercial banks . Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.
