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 governmen

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Q: 2 (IAS/2012)
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 :

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,174,98,43,23,174,32

keywords: 

{'money supply': [0, 0, 1, 3], 'currency': [0, 1, 0, 3], 'government securities': [0, 1, 0, 5], 'economy': [1, 3, 8, 35], 'central bank': [0, 0, 1, 2], 'increase': [3, 1, 10, 35], 'commercial banks': [0, 0, 1, 1], 'deposit': [1, 1, 0, 5], 'government': [5, 0, 0, 1], 'sale': [0, 0, 0, 5]}

The correct response is option 3: 1 and 3. Here`s why:

1. Purchase of government securities from the public by the Central Bank- This would increase the money supply as the central bank is buying securities from the public, effectively leading to more money in the economy as the central bank gives out money to the public in exchange for securities.

2. Deposit of currency in commercial banks by the public- This does not directly increase the money supply in the economy. It changes where the money is kept but does not create new money.

3. Borrowing by the government from the Central Bank- This would increase the money supply. When the government borrows from the Central Bank, it means the Central Bank is effectively creating new money, which increases the money supply.

4. Sale of government securities to the public by the Central Bank- This would decrease the money supply. Money from the economy is used to buy these securities, meaning there is less money circulating in the economy. Hence, this cannot result in an increase in the money supply in the economy.