Q.Explain the monetary and fiscal measures used by the government and the RBI to control inflation.

Monetary measures work by tightening credit and money supply through the RBI; fiscal measures work by directly reducing government and household spending.

Monetary measures, administered by the RBI, aim to reduce the money supply and make credit costlier and scarcer (a 'dear money' policy): raising the repo rate (the rate at which the RBI lends to banks) makes bank borrowing costlier, discouraging further credit expansion; raising the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) forces banks to keep a larger share of deposits locked away, reducing funds available for lending; Open Market Operations (OMO) — selling government securities — directly absorb money out of circulation; and raising the bank rate signals a broader tightening of credit conditions across the banking system.

Fiscal measures, administered by the government, aim to reduce aggregate demand directly: reducing public expenditure, especially on non-essential spending; increasing direct and indirect taxes, which lowers households' disposable income and spending capacity; reducing deficit financing, i.e. borrowing less from the RBI (which would otherwise create new money); and generally aiming for a smaller budget deficit or a surplus, withdrawing demand pressure from the economy. …

A common gap is naming only monetary measures (repo rate, CRR/SLR) and leaving out fiscal measures entirely, or vice versa — a complete Gujarat Board Std 12 Economics answer on this topic needs both categories, since the two work thr …