Identify the monetary measure being referred to each of the following and discuss whether the tool would be used during a situation of excess demand or deficient demand.
Buying government securities (G-Sec) from public.
Identify the monetary measure being referred to each of the following and discuss whether the tool would be used during a situation of excess demand or deficient demand.
Buying government securities (G-Sec) from public.
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Solution and Explanation
When the central bank buys government securities (G-Sec) from the public in the open market, the tool is Open Market Operations (OMO).
Step 2: See how it works:
The RBI pays for the securities. This money goes into the bank accounts of the public and the banks.
Banks then have more cash reserves and can give more loans. The money supply in the economy rises.
Step 3: Decide the demand situation:
More money supply means more spending and a rise in aggregate demand.
So buying G-Sec is used to correct a situation of deficient demand. In excess demand the RBI would sell securities instead.
Final Answer:
The tool is Open Market Operations, and buying G-Sec is used in deficient demand. \[ \boxed{\text{Open Market Operations; deficient demand}} \]
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