How to solve deflation?

Some of the steps taken to solve the problem of deflation are cutting tax rates, reducing target interest rates, reducing the reserve limits of the banks, open market operations, quantitative easing, increasing expenditure by the Government. You can read about the Inflation in Economy- Types of Inflation, Inflation Remedies [UPSC Notes] in the given link.

Deflation leads to decline in the economy. Quantitative easing means central banks purchasing the bonds of the Government by creating more money. This will help in increasing the supply of money by reducing bond yields. Open Market Operation (OMO) is the buying and selling of government securities in the open market by the Central Bank, i.e. Reserve Bank of India (RBI). 

RBI carries out the OMO through commercial banks and does not directly deal with the public. The major advantage of open market operations is that they inject money directly into the economy (or they extract money directly from it).

Further readings:

  1. RBI – Know About Reserve Bank of India, Functions, Composition
  2. Monetary Policy Committee (MPC) – An Overview, Instruments of Monetary Policy

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