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 :
1 and 4 only
1 and 3 only
2 and 3 only
2 only
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CDS-2 – 2023
2. **Sale of Treasury Bills by the central bank to public:** The central bank receives money from the public in exchange for securities. This withdraws money from the economy, decreasing money supply (contractionary). This is an Open Market Operation (OMO) used for contraction.
3. **Sale of foreign exchange by the central bank:** The central bank sells foreign currency and receives domestic currency in return. This takes domestic currency out of circulation, decreasing money supply (contractionary).
4. **Purchase of foreign exchange by the central bank:** The central bank buys foreign currency and pays domestic currency. This injects domestic currency into circulation, increasing money supply (expansionary).
Therefore, actions 2 and 3 lead to a contraction of the money supply.