Question

argument.
13. (a) is open market operation a qualitative or quantitative instrument of credit control? Elaborate
how this can be used under the situation of excess demand"
(b) Money resolves the issue of double coincidence of wants". Justify the given statement, using
a bypothetical example,​

Answer 1

a. open market operation is Quantitative or General Method of credit control.

Open market operations refer to sale and purchase of securities in the open market by the central bank. It directly influences the level of money supply in the economy. During excess demand, central bank offers securities for sale. Sale of securities reduces the reserves of commercial banks. It adversely affects the bank’s ability to create credit and decreases the level of aggregate demand in the economy.

b.

Money solves the problem of double coincidence of wants by acting as a medium of exchange. Double coincidence of wants implies a situation where two parties agree to sell and buy each other’s commodities., i.e., what one party desires to sell is exactly what the other party wishes to buy. Money does away with this tedious and complex situation by acting as a medium of exchange that can be used for one and all commodities. For example, if an ice-cream vendor wants a bicycle but the bicycle manufacturer wants clothes, and not ice-creams, then the vendor can use money to obtain a bicycle. He does need to adhere to the bicycle man’s needs because money acts as the common medium of exchange. Similarly, the bicycle manufacturer can then use the money to buy clothes.

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