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:
- A.1 and 4 only
- B.1 and 3 only
- C.2 and 3 only
- D.2 only
Correct answer
Explanation
The correct answer is C, 2 and 3 only. In both actions the central bank takes rupees from the public in exchange for an asset, so money in circulation falls.
When the central bank sells Treasury Bills in open market operations, buyers pay with their bank deposits or cash, which leaves the system and reduces bank reserves. When it sells foreign exchange, for example to stop the rupee falling, it again absorbs rupees from the market. Both shrink reserve money and, through the money multiplier, the wider money supply. Purchases work the other way and inject money.
A is wrong because buying T-Bills (1) and buying foreign exchange (4) both pay out rupees and expand money supply.
B is wrong because statement 1 is an expansion: the central bank pays the public for the bills it buys.
D is wrong because it misses statement 3; selling foreign exchange also drains rupees from the economy.
Exam tip: central bank sells (securities or dollars) → money contracts; central bank buys → money expands.
Practice Questions
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- C.Private Income - Taxes
- D.Total expenditure of Households - Income Tax - Gifts received
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Organization : Union Ministry
I. The National Automotive Board : Ministry of Commerce and Industry
II. The Coir Board : Ministry of Heavy Industries
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- A.Only one
- B.Only two
- C.All the three
- D.None
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1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
- A.1 and 2 only
- B.2 only
- C.1 and 3 only
- D.1, 2 and 3
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2. Establish a policy framework to encourage overseas multinational corporations that collect Big Data to build their large data centres within our national geographical boundaries.
3. Connect many of our villages to the Internet and bring Wi-Fi to many of our schools, public places and major tourist centres.
Select the correct answer using the code given below:
- A.1 and 2 only
- B.3 only
- C.2 and 3 only
- D.1, 2 and 3
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- C.It is the investment which involves debt-servicing.
- D.It is the investment made by foreign institutional investors in the Government securities.
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