An inflationary gap arises when aggregate demand exceeds the maximum potential supply in an economy. To overcome this situation, what mon¬etary measures have been taken by the Central Bank of India

indian-economy
cbse

#1

In times of rise in prices, following monetary measures should be adopted by the government:
(i) Bank Rate Policy—Bank rate is defined as the rate of interest at which the RBI lends to the commercial banks. In a situation of excess demand, the RBI increases the bank rate or interests rate which makes the credit dear. It discourages people to borrow money from the banks.
(ii) Open Market Operation—It is defined as buying and selling of eligible securities in the bill market by the RBI. In a situation of excess demand, RBI sells these eligible securities in its possession to commercial banks so that commercial bank’s cash is blocked in them and their capacity to offer loans is reduced.
(iii) Variable Reserve Ratio—Variable reserve ratio are of two types :
(A) Cash Reserve Ratio (CRR)—It is defined as that portion of total deposits which a commercial bank is required to keep with the RBI in the form of cash reserves. In a situation of excess demand RBI raises the CRR.
(B) Statutory Liquidity Ratio (SLR)—It is defined as that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets.