Question

Which of the following statements about monetary policy tools is correct?

• A. Cash Reserve Ratio affects the inflation rate directly.
• B. Discount rates control the supply of money.
• C. Both (1) and (2) are correct.
• D. Open Market Operations involve the buying and selling of government securities.

Answer 1

The Correct Option is D

To determine which statement about monetary policy tools is correct, we need to analyze each option based on their definitions and roles in economic policy:

• Cash Reserve Ratio (CRR): The CRR is the percentage of a bank's total deposits that must be maintained in reserve either in cash or as deposits with the central bank. While CRR can influence the lending capacity of banks and thus the money supply, it does not directly affect the inflation rate.
• Discount Rates: These are the interest rates charged by a central bank on the loans it provides to commercial banks. While they influence the supply of money by affecting borrowing costs, they are not primarily used to control the supply of money directly.
• Both (1) and (2) are correct: Based on the above, neither option (1) nor option (2) holds entirely accurate in terms of directly affecting inflation or controlling the money supply.
• Open Market Operations (OMOs): OMOs involve the buying and selling of government securities in the open market by the central bank. These operations are a primary tool to regulate the money supply, manage interest rates, and influence liquidity in the banking system.

Given these explanations, the correct statement is that Open Market Operations involve the buying and selling of government securities.