why does inflation get corrected when liquidity gets soaked frm the economy
Give and explain
the reason
class 12 economics cbse
do not spam pls
good ans will be marked as brainliest
Answers
Answer:
I did not know the answer is yes I did not know the answer is yes I did not know the answer 96sstisit
The role to control inflation in the economy is that of both government and Reserve Bank of India(RBI) in India through it's fiscal and monetary policy respectively. The policies are as follow:
1. Fiscal policies refers to the measures which are directly taken by the government to check inflation and deflation in the economy. The measures to check inflation are as follows:
(i) Increase in direct tax: By increasing the direct tax, the real income of public would decrease as a result of which the purchasing power will fall which will ultimately correct inflation as there will be no excess demand in the economy.
(ii) Increase in indirect tax on luxury goods: By increasing the indirect tax on luxury goods,the demand of these goods will fall as the real income of people would be decreased as a result of which excess demand would be balanced in the economy and inflation will be corrected.
(iii) Checking Public expenditure: Government can also cut its public expenditure on developing infrastructure, health, education etc. which will decrease the money supply in the economy as a result of which real income would fall and inflation would be corrected.
(iv) Public borrowing: It refers to the borrowings of government from the public by selling some bonds or treasury bills. If government increases public borrowing then it will soak the liquidity from the economy which reduces the money supply in the economy and hence inflation is corrected.
2. Monetary policies refers to the quantitative and qualitative measures taken by the central bank to correct the situation of inflation and deflation in the economy. These measures are as follows:
(i) Quantitative Methods of monetary policy includes those instruments which focus on the overall supply of the money. It includes:
A. Two Policy Rates:
Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
B. Two Policy Ratio:
Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.
C. Open Market Operations:
Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity.
(ii) Qualitative Methods of monetary policy includes those instruments which focus on the selected sectors of the economy. It includes:
A. Margin Requirement:
Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation.
B. Rationing of Credit:
Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy.
C. Moral Suasion:
The central bank makes the member bank agree through persuasion or pressure to follow its directives which is generally not ignored by the member banks. The banks are advised to restrict the flow of credit
here is your answer mate mark as brainliest and FØŁŁØW me