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 code given below:

1. 1 only
2. 2 and 4 only
3. 1 and 3 only
4. 2, 3 and 4 only

Explanation

Measure 1 is correct

• When the Central Bank purchases government securities, it injects money into the economy, increasing the money supply.

Measure 2 is incorrect

• When the public deposits currency in banks, there is no net increase in the money supply, as currency is merely transferred from the public to banks.
• However, it may enable banks to extend credit, but this is not a direct increase in money supply.

Measure 3 is correct

• Borrowing by the government from the central bank increases the money supply by injecting money into the market.

Measure 4 is incorrect

• When the Central Bank sells government securities, money is taken out of circulation as the public pays for these securities.

Answer: (c) 1 and 3 only; Difficulty Level: Easy