Read the following report carefully and answer the question on the basis of the same: In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods. In India, the wholesale price index is divided into three groups: Fuel and Power (13.2 percent), Primary Articles (22.6 percent of total weight) and Manufactured Products (64.2 percent). Food Articles from the Primary Articles Group account for 15.2 percent of the total weight. The most important components of the Manufactured Products Group are Basic Metals (9.7 percent of total weight); Food products (9.1 percent); Chemicals and Chemical products (6.5 percent) and Textiles (4.9 percent).

With the view to correct the inflationary gap, which of the following monetary policy measures should be adopted?

sale of securities

The correct answer is option 3: sale of securities

Sale of securities: This is a contractionary monetary policy measure. Selling securities decreases the money supply because it absorbs excess liquidity from the banking system as banks pay for the securities, leading to higher interest rates. Thus, it will help in controlling the inflation.

Among the options provided:

1. Decrease in margin requirement: This would encourage more borrowing and increase the money supply, which is not suitable for addressing an inflationary gap.

2. Decrease in cash reserve ratio (CRR): This would also increase the money supply by allowing banks to hold less cash in reserve and lend more, which is contrary to what is needed to correct an inflationary gap.

3. Purchase of securities: This would be an expansionary measure, increasing the money supply, which is not suitable for correcting an inflationary gap.