'Keynes suggested the use of various tools to deal with the situation of Inflationary Gap prevailing in an economy. State and discuss any two monetary policy measures to combat the situation of Inflationary gap in a hypothetical economy.

Question

Accepted Answer

**Two monetary policy measures to combat inflationary gap:**

1. **Increase in Bank Rate:** The Central Bank increases the bank rate, raising the cost of borrowing from the central bank. Commercial banks pass this on to borrowers by increasing lending rates. Higher interest rates discourage borrowing for consumption and investment, reducing aggregate demand and controlling inflation.

2. **Increase in Legal Reserve Ratio (CRR/SLR):** Increasing CRR or SLR reduces the reserves available with commercial banks for lending. This directly limits credit creation capacity, reducing money supply and aggregate demand in the economy, helping to correct the inflationary gap.