Correct Option
Decreased money circulation, or a reduction in the money supply, helps control inflation by curbing aggregate demand. When less money is available in the economy, consumer spending and investment tend to decrease, thereby reducing price pressures. The Reserve Bank of India (RBI) employs various monetary policy tools, such as increasing policy rates (e.g., repo rate), raising the Cash Reserve Ratio (CRR), or conducting open market operations (OMO) to absorb liquidity, to achieve this reduction in money circulation and manage inflation.
Incorrect Options
Option 1: Controlling inflation is a shared responsibility between the Government of India and the Reserve Bank of India. The Government implements fiscal policy measures (e.g., taxation, public expenditure, supply-side interventions), while the RBI manages monetary policy (e.g., interest rates, money supply) to achieve price stability.
Option 2: The Reserve Bank of India plays a crucial and primary role in controlling inflation through its monetary policy framework. Under the Monetary Policy Framework Agreement, the RBI is mandated to maintain price stability, with the primary objective of keeping inflation within a specified target band.
Option 4: Increased money circulation typically contributes to inflation rather than controlling it. A higher money supply, without a corresponding increase in the production of goods and services, leads to more money chasing fewer goods, thereby driving up prices and exacerbating inflationary pressures.