Which of the following measures would result in an increase in the money supply in the economy?
1. Purchase of

Question

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:

Accepted Answer

The correct answer is C because of the following reasons:

1. Purchase of government securities by the Central Bank: When the Central Bank buys securities from the public, it pays them in cash. This injects fresh liquidity into the economy, thereby increasing the money supply.

2. Deposit of currency in commercial banks by the public: This action merely changes the form of money from currency in hand to demand deposits. Since both are components of the same money supply, the total amount remains unchanged.

3. Borrowing by the government from the Central Bank: When the government borrows from the Central Bank, it is often through the creation of new money. As the government spends this borrowed money on public projects or salaries, it increases the total volume of money circulating in the economy.

4. Sale of government securities to the public: When the Central Bank sells securities, the public pays with cash or bank deposits. This pulls money out of the economy and into the Central Bank, leading to a decrease in the money supply.

Therefore, only measures 1 and 3 lead to an increase in the money supply.

Answer

1 only

Answer

2 and 4 only

Answer

1 and 3

Answer

2, 3 and 4

Explanation

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