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Arrange the following in the correct order of sequence in which RBI undertakes open market operation
A. Increase in the money supply
B. Increase in reserves in the economy
C. Impending increase in deflation
D. RBI buys government bonds in the open market
E. Economy recovery
Choose the correct answer from the options given below:
  • a)
    C, D, B, A, E
  • b)
    A, E, D, C, B
  • c)
    D, A, C, B, E
  • d)
    C, E, B, D, A
Correct answer is option 'A'. Can you explain this answer?
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The correct order of sequence in which RBI undertakes open market operation is as follows:

1. Impending increase in deflation (C):
  • The Reserve Bank of India (RBI) intervenes in the economy to maintain price stability, growth and liquidity. If deflation is impending, RBI may undertake open market operations to boost the money supply and stimulate economic growth.
2. RBI buys government bonds in the open market (D):
  • To increase the money supply, RBI buys government bonds in the open market. This injects money into the economy, as banks and financial institutions sell bonds to RBI and receive cash in return.
3. Increase in reserves in the economy (B):
  • As a result of RBI's purchase of government bonds, the banks and financial institutions that sold the bonds now have more cash in their reserves. This increases their ability to lend to businesses and consumers, which can help stimulate economic growth.
4. Increase in the money supply (A):
  • The purchase of government bonds by RBI leads to an increase in the money supply, as more cash is now circulating in the economy. This can help counter deflationary pressures and support economic growth.
5. Economy recovery (E):
  • With increased money supply and higher reserves in the banking system, lending activities are likely to pick up. This can lead to higher investments and consumption, ultimately resulting in economic recovery.
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Arrange the following in the correct order of sequence in which RBI un...
Open Market Operations by RBI

Open Market Operations (OMO) is a monetary policy tool used by the Reserve Bank of India (RBI) to control the money supply in the economy. It involves the buying and selling of government securities in the open market. The correct sequence of events in which RBI undertakes open market operations is as follows:

1. Impending increase in deflation (C)
- Deflation refers to a decrease in the general price level of goods and services in an economy.
- When RBI observes an impending increase in deflation, it aims to stimulate economic activity and increase inflation.

2. RBI buys government bonds in the open market (D)
- To counter deflationary pressures, RBI purchases government bonds from the market.
- By buying bonds, RBI injects money into the economy, increasing the money supply.

3. Increase in reserves in the economy (B)
- When RBI buys government bonds, it pays for them by crediting the reserves of the banks.
- This increases the reserves held by banks, making more funds available for lending and investment.

4. Increase in the money supply (A)
- As the reserves of banks increase, they have more capacity to lend money to businesses and individuals.
- This leads to an increase in the money supply in the economy.

5. Economy recovery (E)
- With an increase in the money supply, businesses and individuals have more access to credit and funds for spending and investment.
- This stimulates economic activity, leading to a recovery in the economy.

The correct sequence of events in which RBI undertakes open market operations is: A, E, D, C, B.
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Arrange the following in the correct order of sequence in which RBI undertakes open market operationA. Increase in the money supplyB. Increase in reserves in the economyC. Impending increase in deflationD. RBI buys government bonds in the open marketE. Economy recoveryChoose the correct answer from the options given below:a)C, D, B, A, Eb)A, E, D, C, Bc)D, A, C, B, Ed)C, E, B, D, ACorrect answer is option 'A'. Can you explain this answer?
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