Economics question cpt

At the time of inflation, RBI reduce_____________ ?

Originally posted by : Gaurav Mohnani
	At the time of inflation, RBI reduce_____________ ?

reserve rates.........

agree with nafi

Best measure to control credit during inflation is CRR so variable reserve rates is wright answer

RBI doesn't reduce reserve rates to control inflation. By Reducing reserve rates more money enters into the system because banks can keep less proportion of there money in reserves and more can be lended to the outside. As such It will increase inflation and wouldn't help the objective of controlling inflation, to control Inflation you have to reduce the amount of money in the system. That is why RBI did not recently cut any interest rates or reserve ratios because inflation is again increasing. the correct answer is selling of securities in open market, When RBI sells securities in open market, It takes out money out of the system by giving out bonds. so inflation can be controlled.(actually this tool is used very infrequently by RBI. But this is used a lot in USA to control inflation(this is called open market operations). Usually to control inflation, RBI raises interest rates or reserve ratios. so We can control inflation by raising reserve ratios or interest rates or by selling securities in open market

tejesvi kasturi is right. You cannot allow too much cash in circulation and if too much cash in the hands of banks they will lend or invest that will cause stagflation that is rihjt fear of RBI. RBI  need not heed what govt says but it is a constitutional independent body to manage money.

It uses its wisdom in controlling inflation and that may affect growth of economy still it is ok in the short time may be 6 months as economy is weak to absorb the inflation.

instruments need to work macro economy and not just export and import alone.

india has very high debt due to import of gold for re-export back as also domestic consumption, even Dr.Rangaraan admitted our deficit is equal to gold imports that is tottering economy.

so RBI is right authority to handle the banks and lending and borrowing rates plus RBI may issue bonds to absorb excess money in circulationunder free market operations.  

When prices of normal good falls, the real income of the consumer increases..

when price of a normal good falls demand expands. Change along the demand curve is said to be expansion or contraction of demand and change of demand curve due to changes in factors other than price is called shift of demand curve and when demand curve shifts to right we say demand increased and when demand curve shifted to left we say demand decreased. But when a price of a commodity falls, we can buy more of the same commodity for the same amount of income. so purchasing power of income and hence real income rises even if the nominal income(i.e. the income in terms of money) doesn't change

So,am I right @ Tejaswi ?