1)How can the RBI control the situation of inflation and deflation through an open market operation?

2)Which interest rate is used in the macroeconomic analysis?

1)By open market operation, the central bank can sell the government to securities to decrease the money supply in the market whereas the central bank can purchase the government securities to increase the money supply in the market. By decreasing the money supply, the situation of excess demand arises in the money market which means that people have less money to spend on the goods market. Now, the producers have to decrease the price in order to reduce the excess supply in the goods market. Therefore, an open market sale of securities creates deflation in the market. Similarly, an open market purchase of the securities creates inflation in the market.

2)The federal fund rate is used in macroeconomic analysis such that it the interest rate that the bank charge from other banks in order to lend the money which is kept by the banks in the form of reserve. It is also charged by the federal open market committee eight times in a year by setting the federal fund rate. In the inflation, the federal reserve sells the government securities in the open market which reduces the money supply in such a manner that the LM curve shifts leftward which increases the rate of interest in such a way that the investment decreases that causes the aggregate demand curve shifts leftward such that both price level and output decreases.