Question

Read the following statements carefully :
Statement 1: The government may reduce the repo rate, to control deflationary gap prevailing in the economy.
Statement 2: The government may reduce the deflationary gap, by selling off 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:

To combat a deflationary gap, the central bank can lower the repo rate and perform open market operations such as selling government securities to control the money supply.

Answer 1

The Correct Option is C

Statement 1 is true because reducing the repo rate helps in controlling the deflationary gap by encouraging borrowing and spending in the economy.
Statement 2 is also true because selling government securities in the open market is an open market operation that can help reduce the deflationary gap by reducing the money supply.