Question

For reducing the supply of money the government -

• A. reduce interest rates
• B. Buy back government bonds.
• C. sell government bonds
• D. encourage banks to lend

Answer 1

Answer: (C)

sell government bonds

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities of the government in the open market to control the supply of money in the economy. By selling the government's securities and bonds, the central bank soaks liquidity from the economy which controls the inflation in the economy by decreasing the purchasing power of the people owing to reduction in the money supply. Therefore, for reducing the supply of money, the government sells securities and bonds in the open market.