An inflationary gap arises when Aggregate Demand exceeds the maximum

inflation

#1

An inflationary gap arises when Aggregate Demand exceeds the maximum potential supply in
an economy. To overcome this situation. What monetary measures have been taken by the Central Bank of India.


#2

In times of rise in price, 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 interest rate which makes the credit clear. 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 open market by the RBI. In a situation of excess demand, RBI sells these eligible securities in its possession to commercial banks so that commercial banks cash is blocked with RBI and their capacity to offer loans is reduced.
(iii) Variable Reserve Ratio Variable reserve ratios which are of two types are increased
(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.
(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.