Money Supply and Monetary Policy

Economic Affairs

Title

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Indian Economy - Understanding the basics of Indian economic system

Which of the following action by the Government would lead to contraction of money supply in the economy ?

Purchase of Treasury Bills by the central bank from public

Sale of Treasury Bills by the central bank to public

Sale of foreign exchange by the central bank

Purchase of foreign exchange by the central bank

Purchase of Treasury Bills by the Central Bank from Public: When the central bank purchases Treasury Bills from the public, it essentially injects money into the economy, thus expanding the money supply, not contracting it.
Sale of Treasury Bills by the Central Bank to Public: When the central bank sells Treasury Bills to the public, it takes money out of the economy, thus contracting the money supply.
Sale of Foreign Exchange by the Central Bank: When the central bank sells foreign exchange, it receives domestic currency in return. This action can increase the foreign exchange reserves but doesn't necessarily contract the money supply.
Purchase of Foreign Exchange by the Central Bank: When the central bank purchases foreign exchange, it releases domestic currency into the economy. This increases the money supply rather than contracting it.