Question

Which of the following monetary measures may be adopted to correct deficient demand?

• A. Reduction in bank rate
• B. Buying securities in open market
• C. Reducing cash reserve ratio
• D. All of these

Hint:

To fight deficient demand (a slump), the central bank makes money "cheaper" and more available. This involves cutting rates and injecting cash into the system.

Answer 1

The Correct Option is D

Deficient demand (or a deflationary gap) occurs when aggregate demand is less than aggregate supply at the full employment level, leading to unemployment and falling output. To correct this, the central bank implements an expansionary (or "easy") monetary policy to increase the money supply and encourage spending. The measures include:

(A) Reduction in Bank Rate: Makes borrowing cheaper for commercial banks, encouraging them to lend more at lower rates.
(B) Buying Securities (OMO): Injects money into the banking system, increasing banks' capacity to lend.
(C) Reducing CRR: Frees up reserves, allowing banks to lend out a larger portion of their deposits.
All these actions increase the availability of credit and lower its cost, thereby boosting aggregate demand.