Q77.
Which of the following measures would result in an increase in the money supply in the economy? 1. Purchase of government securities from the public by the Central Bank. 2. Deposit of currency in commercial banks by the public. 3. Borrowing by the government from the Central Bank. 4. Sale of government securities to the public by the Central Bank. Select the correct answer using the codes given below:
Answer
C
Explanation
Statement 1: When the Central Bank purchases government securities from the public (Open Market Operations — buying), it injects money into the economy — money supply increases. Statement 3: When the government borrows from the Central Bank, the Central Bank creates new money to lend — money supply increases. Statement 2: Deposit of currency in banks does NOT increase money supply — it changes the form (cash to bank deposit) but the total money (M1/M3) may actually be the same or increase through credit creation, but this is a complex scenario; in the given context, depositing existing currency doesn't increase base money supply. Statement 4: Sale of securities by Central Bank absorbs money from the economy — money supply decreases.