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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 the 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
​Q. Select the correct answer using the codes given below:
  • a)
    1 Only
  • b)
    2 & 4 Only
  • c)
    1 & 3
  • d)
    2, 3 & 4
Correct answer is option 'C'. Can you explain this answer?
Verified Answer
Which of the following measures would result in an increase in the mon...
  • Money Supply is the current total supply of money in circulation in the whole economy of the country. There are three measures of money supply referred to as M1, M2, and M3.
  • M1 is a narrow measure of money's function as a medium of exchange. It includes all coins, publicly held currency, traveler's checks, and money account balances for checking accounts, credit union accounts, NOW accounts, and automatic transfer service accounts.
  • M2 is a broader measure that also reflects money's function as a store of value. M2 includes M1 plus savings and small time deposits, overnight repossessions at commercial banks, and non-institutional money market accounts. M2 is a key economic indicator which helps forecast inflation.
  • M3 is an even broader measure that includes close substitutes for money. M3 includes M2 plus large time deposits, repossessions of maturity greater than one day at commercial banks, and institutional money market accounts.
 Ways to increase the money supply
  • Print more money – usually, this is done by the Central Bank, though in some countries governments can dictate the money supply. For example in Zimbabwe 2000s – the government printed more money to pay wages.
  • Reducing interest rates. Lower interest rates reduce the cost of borrowing. This makes investment relatively more profitable, and so encourages economic activity. Consumers will also see cheaper mortgage payments leading to higher disposable income. Read more – effect of cutting interest rates
  • Quantitative easing The Central Bank can also electronically create money. Under a policy of quantitative easing, they decide to increase their bank reserves ‘effectively create money out of thin air’. The created money can be used to buy assets; the idea is to increase cash reserves of banks.
  • Reduce the reserve ratio for lending. The reserve ratio is the percentage of deposits that bank keeps in cash reserves. If the reserve ratio is reduced, then the bank will lend more and due to the money multiplier, we will see a rise in bank lending. Central Banks can set a minimum reserve ratio. Reducing this ratio
  • Increase confidence in the banking system. If banks have confidence in the financial system, then they will be more willing to lend. In the credit crisis, it was necessary for the government to guarantee bank deposits and nationalise struggling banks
  • Central Bank buying government securities. The Central Bank pays investors holding bonds. If the Central Bank buy Government securities (or corporate bonds) people who were holding the bonds have more money to spend. Banks see illiquid assets become liquid. Therefore, in certain circumstances, this can lead to an increase in the money supply. However, it depends on whether the bond purchases are sterilised or ‘unsterilised’. Unsterilised means they create money to buy bonds.
  • Expansionary fiscal policy. In a recession, there is often a ‘paradox of thrift’ business and consumers want to increase savings – and this leads to a fall in spending and investment. If the government borrows from the private sector and spends on public work investment schemes then this will start a multiplier effect where households gain wages to spend and encourage private sector investment.
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Which of the following measures would result in an increase in the mon...
Onlyc)1 and 3d)1, 2, and 3
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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 Bank2. Deposit of currency in the commercial banks by the public3. Borrowing by the government from the Central Bank4. Sale of government securities to the public by the Central BankQ.Select the correct answer using the codes given below:a)1 Onlyb)2 & 4 Onlyc)1 & 3d)2, 3 & 4Correct answer is option 'C'. Can you explain this answer?
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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 Bank2. Deposit of currency in the commercial banks by the public3. Borrowing by the government from the Central Bank4. Sale of government securities to the public by the Central BankQ.Select the correct answer using the codes given below:a)1 Onlyb)2 & 4 Onlyc)1 & 3d)2, 3 & 4Correct answer is option 'C'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about 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 Bank2. Deposit of currency in the commercial banks by the public3. Borrowing by the government from the Central Bank4. Sale of government securities to the public by the Central BankQ.Select the correct answer using the codes given below:a)1 Onlyb)2 & 4 Onlyc)1 & 3d)2, 3 & 4Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for 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 Bank2. Deposit of currency in the commercial banks by the public3. Borrowing by the government from the Central Bank4. Sale of government securities to the public by the Central BankQ.Select the correct answer using the codes given below:a)1 Onlyb)2 & 4 Onlyc)1 & 3d)2, 3 & 4Correct answer is option 'C'. Can you explain this answer?.
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