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

• A. Only 1
• B. 2 and 4
• C. 1 and 3
• D. 2 , 3 and 4

Answer 1

The correct option is C 1 and 3

Money supply increases when money flows out of the RBI. Purchase of Govt securities from the public by the Central bank leads to transfer of money to the public thereby leading to increase in money supply in the economy. Similarly, borrowing by the government from Central bank leads to increased money supply.

However, deposit of currency in commercial banks by public doesn't lead to increase in money supply as the money just gets transferred from public to commercial banks.