Arrange the following statements related to open market operations, a tool used by the Reserve Bank of India to control money supply in the economy, in the correct order of occurrence:
A. The total amount of reserves in the economy increases.
B. RBI buys government bonds.
C. As a result, money supply will increase.
D. RBI pays for the bonds by providing a cheque.
Choose the correct answer from the options given below:
Arrange the following statements related to open market operations, a tool used by the Reserve Bank of India to control money supply in the economy, in the correct order of occurrence:
A. The total amount of reserves in the economy increases.
B. RBI buys government bonds.
C. As a result, money supply will increase.
D. RBI pays for the bonds by providing a cheque.
Choose the correct answer from the options given below:
Solution
In an expansionary open market operation, the RBI first buys government bonds (B), then pays for them by issuing a cheque (D). When the cheque is deposited and cleared, total reserves with the banking system rise (A), and through credit creation the money supply increases (C). Correct order: B, D, A, C.
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