Multiple choice

During depression, it is advisable to

  1. lower bank rate and purchase securities in the market

  2. increase bank rate and purchase securities in open market

  3. decrease bank rate and sell securities in the open market

  4. increase bank rate and sell securities in the open market
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A Correct answer
Explanation

During a depression, the central bank should stimulate the economy by lowering the bank rate (cheaper borrowing encourages investment and spending) and purchasing securities in the open market (injects money into the banking system, increasing lendable reserves). This is expansionary monetary policy to combat recession.

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