UPSC CSE Prelims
Question 46
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:
View correct answer and explanation
Correct answer: C
Correct Option: C
Explanation: Central-bank purchase of securities injects liquidity, as does financing a government loan by creating central-bank money.
Statement/Item-wise Analysis:
1: Correct - Open-market purchases by RBI add money/reserves to the banking system.
2: Incorrect - Converting cash holdings into bank deposits by the public alone mainly changes money’s form, not total stock.
3: Correct - Government borrowing from RBI can create additional high-powered money.
4: Incorrect - Open-market sales withdraw liquidity, reducing rather than increasing money supply.
Option-wise Analysis:
A: Incorrect - omits correct item 3.
B: Incorrect - includes incorrect items 2, 4; omits correct items 1, 3.
C: Correct - includes exactly the valid statements/items and excludes the invalid ones.
D: Incorrect - includes incorrect items 2, 4; omits correct item 1.