Question : During deflation, it is advisable to:
Option 1: Lower the bank rate and purchase of securities in the open market
Option 2: Increase the bank rate and purchase of securities in the open market
Option 3: Lower the bank rate and sale of securities in the open market
Option 4: Increase the bank rate and sale of securities in the open market
Correct Answer:
Lower the bank rate and purchase of securities in the open market
Solution : The correct answer is (a) Lower the bank rate and purchase of securities in the open market
Lowering the bank rate refers to reducing the interest rate at which central banks lend to commercial banks. This action encourages borrowing and investment, stimulating economic activity. Additionally, the purchase of securities in the open market injects money into the economy, increasing liquidity and providing further support to spending.
