Q. With reference to measures to check inflation, consider the following statements:
1.An increase in the Cash Reserve Ratio (CRR) is a measure to absorb excess liquidity from the banking system.
2.The government can sell bonds in the open market to reduce the money supply.
3.Fiscal policy measures to curb inflation primarily focus on increasing public expenditure to stimulate economic activity.
Which of the statements given above are correct?

[A] 1 only

[B] 1 and 2 only

[C] 2 and 3 only

[D] 1, 2 and 3

Answer: B
Notes:

Explanation:

  • Statement 1: The Cash Reserve Ratio (CRR) is a monetary policy tool. By increasing the CRR, the central bank requires commercial banks to hold a larger portion of their deposits as reserves, thereby reducing the amount of money available for lending and contracting the money supply.
  • Statement 2: This is an example of Open Market Operations (OMOs), a monetary policy tool. When the central bank sells government securities, it absorbs money from the market, reducing the money supply and curbing inflation.
  • Statement 3: Fiscal policy measures to curb inflation involve contracting the economy. This includes measures like reducing government spending and increasing taxes, which decrease aggregate demand and help to cool down an overheated economy. Increasing public expenditure would be an expansionary fiscal policy, which could worsen inflation.
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