How can a central b ank control excess demand in an econ omy by making changes in the legal reserve requirements?

What are the instruments of monetary policy of RBI? How dose RBI stabilze money supply against exogenous shocks ? Hint: The instruments of monetary policy of RBI can be broadly classified into two-groups: (i) Quantitative Instruments: (a) Repo Rate and Bank Rate, (b) Open Market Operation, (c) Legal Reserve Requirements. (ii) Qualitative Instruments: (a) Margin requirements, (b) Mqral Suasion, (c) Selective Credit Controls. RBI controls the money supply and credit in the best interests of the economy. It helps to stabilize money supply against exogenous shocks. For explanation, discuss "Controller of Money Supply and Credit”.

How does increase in taxes help to control the situation of excess demand? OR Explain the role of taxation in reducing excess demand.