In order to control the money supply in the economy, the Central Bank may ____.
In order to control the money supply in the economy, the Central Bank may ____.
(a) Buy Securities in the Open Market
(b) Sell Securities in the Open Market
(c) Reduce Cash Reserve Ratio
(d) Reduce Repo Rate
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Ans – (a) or (b) or (c) or (d)
Explanation:-
Money supply can be controlled by:
Buying securities in the open market. It increases the cash reserves of the commercial bank. It increases the credit-creating capacity and thus money supply increases.
Selling securities in the open market decreases in cash reserves of the commercial bank and thus money supply increases.
It decreases the credit-creating capacity and thus money supply decreases
Reduction in the cash reserve ratio increases the cash reserves of the commercial banks. It increases the credit-creating capacity and thus money supply increases.
Reduction in the repo rate encourages commercial banks to reduce the rate of interest on loans. It increases the credit-creating capacity and thus money supply increases.
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