Question

Refer to the given image carefully:

Explain any two indicated measures taken by the Central Bank to control the highlighted macroeconomic issue.

Answer 1

To deal with the situation of the highlighted macroeconomic issue, i.e., inflation, the Central Bank may use the following measures:

1. Repo Rate: A rise in repo rate will force the commercial banks to increase the lending rates, making the credit dearer for the general public, discouraging the borrowings. Consequently, aggregate demand will fall, thus correcting the problem of inflation in the economy.
2. Open Market Operations: The Central Bank can sell government securities in the open market, thereby reducing the availability of funds with the commercial banks for lending. Consequently, aggregate demand will fall, thus correcting the problem of inflation in the economy.