Answer :

The monetary measure is the measure used by the central bank to control the inflation in the economy. This control of inflation is carried by the process of the credit control measures. The central bank is the apex bank in the economy which has the greater power in controlling the inflation. Central bank regulates all the commercial banks and the financial institution which involves in the process of credit creation. The central bank uses the cash reserve ratio, open market operation and many other approaches to control inflation.


The cash reserve ratio is the portion that is to be held with the central bank by the commercial bank. When the economy faces the condition of inflation, then the central bank will increase the ratio that is to be held with the central bank by the commercial bank. Because of increase in the ratio then the portion held in central bank increases. Then lending capacity of the commercial bank decreases simultaneously supply of money in the economy decreases. Hence the inflation is controlled through the credit creation process.


The open market operation is another method used by the commercial bank in which the central sells all the securities in order to reduce the purchasing power of the people in the economy. When the securities are sold then the disposable income of the people decreases, then the purchasing power will also be reduced. Since the purchasing power is reduced, then the inflation can be reduced effectively.


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