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 codes given below:

[UPSC Civil Services Exam – 2012 Prelims]

(a) 1 only

(b) 2 and 4 only

(c) 1 and 3

(d) 2, 3 and 4

Answer: (c)        

Explanation:

• When the RBI aims to expand the money supply in the economy, it accomplishes this by purchasing government securities from the market, resulting in an increased flow of money in the market. Therefore, statement 1 is correct.
• Depositing of currency in commercial banks by the public does not increase the money supply in the market; instead, it reduces it. Hence, statement 2 is incorrect.
• Government borrowing from the central bank results in the release of money to the central bank, which can subsequently inject the money into the market through loans and other means. Therefore, statement 3 is correct.
• The sale of government securities by the central bank to the public actually leads to a reduction in the money supply within the market. Consequently, statement 4 is incorrect.