Question

The Indian economy experienced a great inflation in the past few years.

What could the RBI do to control this situation in the country?

• A. The RBI could decrease the money circulation in the economy.
• B. The RBI could increase the money supply in the economy.
• C. The RBI could decrease the interest rates on loans.
• D. The RBI could decrease the interest rates on deposits in banks.

Answer 1

The correct option is A The RBI could decrease the money circulation in the economy.

Inflation refers to an increase in the general price level over a period of time. When prices increase suddenly, not all people can afford to buy the products at high prices.

The RBI controls the prices of goods and services through the monetary policy. The regulation of money supply results in less money circulation and encourages people to spend less. Eventually, it reduces the prices of goods and services due to less demand. Therefore, the stability in the demand and supply of products is restored.