Distinguish between Inflationary Gap and Deflationary Gap. State two measures by which these can be corrected.
Answers
Open Market Operations refers to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of Commercial Banks and citizens of the country. In case of Deflation, the Central Bank purchased securities from public. It increases the supply of money in the economy and credit/money creation power of Commercial Banks. Thus, the Aggregate Demand increases and ultimately the economy attains equilibrium. (ii) Role of Open Market operations in Correcting Inflationary Gap in an Economy: In case of Inflation, the Central Bank sell the securities to the public. It reduces the supply of money in an economy and credit/ money creation power of Commercial Banks. Thus, the Aggregate Demand decreases and ultimately the economy attains equilibrium.Read more on Sarthaks.com - https://www.sarthaks.com/85142/distinguish-between-inflationary-gap-deflationary-state-measures-which-these-corrected