Prelims 2012 · Economy · Question 77
Which of the following measures would result in an increase in the money supply in the economy?
- Purchase of government securities from the public by the Central Bank.
- Deposit of currency in commercial banks by the public.
- Borrowing by the government from the Central Bank.
- Sale of government securities to the public by the Central Bank.
Select the correct answer using the codes given below:
Answer
1 and 3
1. Purchase of government securities from the public by the Central Bank — This is an open market purchase; the Central Bank pays the public/banks, injecting liquidity. Correct.
2. Deposit of currency in commercial banks by the public — This shifts money from currency with the public to bank deposits; it changes composition, not total money supply by itself. Incorrect.
3. Borrowing by the government from the Central Bank — This monetizes government deficit; new high-powered money is created, raising money supply. Correct.
4. Sale of government securities to the public by the Central Bank — This is an open market sale; the public pays the Central Bank, withdrawing liquidity. Incorrect.
Hence, statements 1 and 3 are correct.