Economics 4 Marks Question

Open market operations: Open market operations refers to buying and selling of government securities by the central bank from/to the public and commercial banks. RBI is authorised to sell or purchase treasury bills and government securities. Sale of securities by central bank reduces the reserves of the commercial bank. It adversely affects the bank's ability yo create credit and therefore decreases the money supply in the economy.
Purchase of securities by central bank increases the reserves and raises the bank's ability to give credit.
Margin Requirements : Margin is the difference between the amount of loan and market value of the security offered by the borrower against the loan. If the margin fixed by central bsnk is 30%, then the commercial banks are allowed to give loan upto 70% of the value of securities. By changing the margin requirements the Cental bank can alter the amount of loans made sgainst securities by the bank.

Reverse Repo rate is the rate of interest at which commercial banks can park their excess reserve or surplus funds with the central bank, for a relatively shorter period of time. To deal with the situation of excess demand this rate may be increased by the central bank. It may encourage the commercial bank to park their surplus funds with Central Bank. As a result, the availability of creating credit with the commercial bank will be reduced and the money supply tends to reduce so it will reduce the availability of money from the economy. Consequently, consumption expenditure and investment expenditure may get reduced, implying a reduction in Aggregate Demand.