Which of the bull following action s by the Government would lead to contraction of money supply in ...........

Indian Economy (CDS) Money and banking

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

1. Purchase of Treasury Bills by the central bank from public

2. Sale of Treasury Bills by the central bank to public

3. Sale of foreign exchange by the central bank

4. Purchase of foreign exchange by the central bank

Select the correct answer using the code given below :

This questions was previously asked in

2023 CDS -2 GK

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1 and 4 only

1 and 3 only

2 and 3 only

2 only

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Explanation:

- Statement 1: Purchase of Treasury Bills by the central bank from the public increases money supply. The central bank pays for the bills, injecting money into the economy.

- Statement 2: Sale of Treasury Bills by the central bank to the public decreases money supply. The public pays the central bank, reducing money in circulation.

- Statement 3: Sale of foreign exchange by the central bank decreases money supply. As the central bank sells foreign currency, the local currency is taken out of the economy.

- Statement 4: Purchase of foreign exchange by the central bank increases money supply. The central bank pays in local currency, injecting it into the economy.

- Option 1: Includes statement 1 and 4 which increase money supply.

- Option 2: Includes statement 1 which increases money supply.

- Option 3: Includes statement 2 and 3 which decrease money supply.

- Option 4: Includes statement 2 which decreases money supply.

Correct Answer: Option 3 - 2 and 3 only.