CA Foundation · Business Economics · Business Cycles
Which of the following monetary policy actions by the RBI would be most appropriate to counter a recession?
Buying government securities through open market operations is the expansionary action suited to a recession. It injects money into banks, raises their lending capacity and reduces interest rates, which stimulates spending. Raising the CRR or bank rate, or selling securities, would withdraw liquidity and deepen the downturn.
- ARaising the cash reserve ratio
- BSelling government securities in open market operations
- CBuying government securities in open market operationsCorrect
- DRaising the bank rate
Explanation
Buying securities injects liquidity into the banking system, increases lendable funds and lowers interest rates, encouraging investment and consumption. The other three actions all reduce liquidity or raise borrowing costs and are contractionary.
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