Economics 4 Marks Question

Monetary Policy: It is the policy of correcting excess or deficient demand in the economy by controlling the supply of credit.
The three instruments of monetary policy include,
i. Open market Operations: It refers to the sale and purchase of securities and bonds by the central bank in the open market.
ii. Cash Reserve Ratio (CRR): It refers to the ratio between "cash reserve of the commercial bank with RBI" and their total deposits.
iii. Margin Requirement: It is the difference between the amount of loan granted and the current value of security offered for loans.

India’s GDP contracted 23.9% in the April-June quarter of 2020-21 as compared to same period of 2019-20, suggesting that the lockdown has hit the economy hard. The situation suggests that Aggregate Demand is less than Aggregate Supply. Following two fiscal measures may be taken to control it:
a. Decrease in Taxes: To curb the situation, the government may decrease the taxes. This may increase the purchasing power in the hands of the general public. This may increase the Aggregate Demand in the economy to bring it equal to the Aggregate Supply.
b. Increase in Government Expenditure: The government may also increase its expenditure. This may increase the purchasing power in the hands of the general public which in turn may increase the Aggregate Demand in the economy to bring it equal to the Aggregate Supply.