Explain the role of Government expenditure and Open Market Operation i

1.	Explain the role of Government expenditure and Open Market Operation in reducing AD/excess demand.
Answer» (a) Government Expenditure: 1. Government has to invest huge amount on public works like roads, buildings, irrigation works, etc. 2. During inflation, government should curtail (reduce) its expenditure on public works like roads, buildings, irrigation works thereby reducing the money income of the people and their demand for goods and services. (b) Open Market Operation: 1. It consists of buying and selling of government securities and bonds in the open market by central bank. 2. In a situation of excess demand leading to inflation, central bank sells government securities and bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving loans decreases, which will control excess demand.

Explain the role of Government expenditure and Open Market Operation in reducing AD/excess demand.

Answer»

(a) Government Expenditure:

1. Government has to invest huge amount on public works like roads, buildings, irrigation works, etc.

2. During inflation, government should curtail (reduce) its expenditure on public works like roads, buildings, irrigation works thereby reducing the money income of the people and their demand for goods and services.

(b) Open Market Operation:

1. It consists of buying and selling of government securities and bonds in the open market by central bank.

2. In a situation of excess demand leading to inflation, central bank sells government securities and bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving loans decreases, which will control excess demand.

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