Question

Read the following statements carefully :
Statement 1 : During deflationary gap, the Central Bank of a country may increase the repo rate.
Statement 2 : The government can reduce the deflationary gap by purchasing Government Securities (G-Sec) in the open market.
In the light of the given statements, choose the correct option from the following :

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

In a deflationary gap, monetary policy aims to increase the money supply by lowering the repo rate and purchasing securities, which stimulates economic activity.

Answer 1

The Correct Option is B

Statement 1 is false because during a deflationary gap, the Central Bank typically lowers the repo rate to encourage borrowing and spending, rather than increasing it.
Statement 2 is true because the government can reduce a deflationary gap by purchasing government securities in the open market, which injects liquidity into the economy and encourages spending.