In case of deficit demand, the Central Bank of India (RBI) will change its monetory policy related to open market operation. Identify the action to be taken by RBI accordingly.
Answer & explanation
Correct answer: option 1
The correct answer is option (1) : RBI will buy government securities
Explanation:
- Deficit demand: This occurs when aggregate demand in the economy is lower than aggregate supply, leading to underutilization of resources and unemployment.
- Open market operations (OMOs): These are actions by the central bank to buy or sell government securities in the open market to regulate the money supply.
- To increase the money supply and stimulate demand, the RBI will buy government securities. When the RBI buys these securities, it injects money into the economy, increasing the liquidity and encouraging borrowing and spending.