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NOTE- Although answer of the asked question starts for the number 2 Monetary Policy, i am giving a little bit more in-detail information with an intension to give a broader persepetive to the asked question...

Governments of any countries use the 2 broad polices- below mentioned- as a control measure of the economy :

1. Through Fiscal policy(Regualte by the government of the country) - Set of programs run by a government in the welfare of the people of the country. Under monetary policy a govnt decides on how much is to be spent on the development activities of the country, decision on different types of tax rates etc. By increasing or decreasing the tax rates, the government controls the level of expenditures of the people.

2. Monetary Policy (Regulated by the central bank of the country ) - Its the control over money supply in the economy. This help to control inflation in a country. 3 broad instruments are :

A) Opent Market Oportunity - Purchase or sale of governemt bonds by the central bank.

B) Reserve Requirement - Using this istrument a governt controls money supply into the economy and hence indirectly controlling the inflation. Under reserve requirements (like, Cash reserve ratio, SLR, C/D etc.) banks of a country are required to keep either the percentage of their deposits as a reserve either with the central bank of the country (RBI in case of India) or invest a definite percentage of their total working capital (like cash) in the government bonds. As a result of these, banks are left with less money available with them to lend. When reserve rates are inceased, the money availble in the economy is less and hence demand decrease.

C) Repo and reverse repo rate - Repo rate is the rate at which government lends money to the commercial banks. Repo rate is simillar to bank rate. The only difference is that repo rate is the rate in imergecy money demand by the banks where as bank rate is the rate implied at normal situations.

Reverse repo rate is the reverse of the repo rate. The intension of this two rates are to restrict the banks from amount of money they inturn can lend to the consumers.

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