Question

You are appointed as the Governor of the RBI. In a bid to control poverty and save people from all turmoil, you decide to print more money and pump it into the economy. Unfortunately, it results in price rice or inflation. Which of the following remedy or remedies would you pursue to revert the economy back to normal?

• A. Increase interest rate
• B. Decrease interest rate
• C. Provide more loans
• D. Provide less loans

Answer 1

Answer: (A), (D)

Provide less loans

Pumping more money into the economy would encourage people to spend more on goods and services. Due to the increase in consumption and higher demand, the price of goods and services would increase, which would result in a situation called inflation.

Therefore, the RBI would tend to reduce the supply of money in the economy. It would do so by charging a higher rate of interest on loans, which would discourage people from availing more loans. Providing lesser loans would in turn reduce the money supply in the economy and would result in less spending by people. This in turn would lessen the demand of goods and services. Therefore, the prices of goods and services would tend to retain the economy at normal levels.