Arrange the following statements in chronological order with respect to open market operation.
(A) Bonds payments increases total reserves in the economy.
(B) RBI buys government bonds from the market.
(C) RBI sell bond if there is excess money supply.
(D) Higher reserves Increase money supply in the economy.
Choose the correct answer from the options given below:
Arrange the following statements in chronological order with respect to open market operation.
(A) Bonds payments increases total reserves in the economy.
(B) RBI buys government bonds from the market.
(C) RBI sell bond if there is excess money supply.
(D) Higher reserves Increase money supply in the economy.
Choose the correct answer from the options given below:
Solution
Option 1 -> Incorrect order - starts with bond payments before the RBI action.
Option 2 -> Incorrect order - places selling bonds before buying bonds.
Option 3 -> Correct chronological sequence of expansionary open market operations.
Option 4 -> Incorrect order - starts with higher reserves before explaining their source.
Hence, Option 3: (B), (A), (D), (C) -> In open market operations, the sequence is: First, RBI buys government bonds from the market (B). This purchase means RBI pays money to bond sellers, which increases total reserves in the banking system (A). These higher reserves enable banks to extend more credit, thereby increasing the overall money supply in the economy (D). Finally, when there is excess money supply and RBI needs to contract liquidity, it reverses the process by selling bonds (C). This represents the complete cycle of open market operations for monetary policy management. -> correct
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