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:
✓ Correct answer: c) 1 and 3
ExplanationStatement 1 is correct : When the central bank buys government securities (like bonds) from the public it injects money into the economy.The sellers of these securities re- ceive cash, increasing the money supply.This is a key tool of monetary policy known as open market operations.Statement 2 is incorrect : When the public deposits currency into commercial banks, it doesn’t increase the overall mon- ey supply.It simply changes the form of money.Currency in circulation decreases but bank deposits increase by the same amount.These deposits can then be used by banks to cre- ate credit.Thus the initial act of depositing cash is neutral with respect to the money supply.Statement 3 is correct : When the government borrows di- rectly from the central bank, it often leads to an increase in the money supply.The central bank essentially creates new money to lend to the government.This is sometimes referred to as “monetizing the debt.”Statement 4 is incorrect : When the Central Bank sells gov- ernment securities to the public, it effectively reduces the amount of money circulating i
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