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Which of the following statements is correct regarding loose credit or easy monetary policy?
1. Central banks reduce the money supply to keep inflation under control
2. Central banks increase the interest rates frequently
3. Central banks reduces the interest rates frequently
4. Central banks expand the money supply to boost the economy

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Correct Answer - Option 4 : Central banks expand the money supply to boost the economy

The correct answer is Central banks expand the money supply to boost the economy.

  • Accommodative monetary policy, also known as loose credit or easy monetary policy, occurs when a central bank attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP). Hence, Option 4 is correct.
  • These measures are meant to make money less expensive to borrow and encourage more spending.

What is a Monetary Policy?

  • Monetary policy is the process by which the RBI controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability.
  • RBI reviews its monetary policy every two months.
  • The RBI implements the monetary policy through open market operations, bank rate policy, CRR, SLR, reserve system, credit control policy, moral persuasion etc.
  • Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy.
  • Increasing money supply and reducing interest rates indicate an expansionary monetary policy. The reverse of this is a contractionary monetary policy.

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