Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q34 (CDS-II/2023) Economy › Money, Banking & Inflation › Monetary policy tools Answer Verified

Which of the following action(s) by the Government would lead to contraction of money supply in the economy? 1. Purchase of Treasury Bills by the central bank from public 2. Sale of Treasury Bills by the central bank to public 3. Sale of foreign exchange by the central bank 4. Purchase of foreign exchange by the central bank Select the correct answer using the code given below : (a) 1 and 4 only (b) 1 and 3 only (c) 2 and 3 only (d) 2 only

Result
Your answer: —  Â·  Correct: C
Explanation

Contraction of the money supply occurs when the central bank withdraws liquidity from the economy. Selling Treasury Bills (T-Bills) to the public is a classic open market operation where the central bank receives cash/reserves from the public in exchange for securities, thereby reducing the domestic monetary base [3]. Similarly, when the central bank sells foreign exchange, it receives domestic currency from the buyer, which effectively removes that money from circulation, leading to a contraction [1]. Conversely, purchasing T-Bills or foreign exchange injects liquidity into the system, increasing the money supply [2]. Therefore, actions 2 (Sale of T-Bills) and 3 (Sale of foreign exchange) are contractionary measures. This process is often part of 'sterilization' to offset capital inflows and manage inflation or currency appreciation [1].

Sources

  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
  2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
  3. [3] https://www.investopedia.com/terms/o/openmarketoperations.asp
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
67%
got it right
✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2012 · Q2 Relevance score: 3.61

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 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 Select the correct answer using the codes given below :

IAS · 2021 · Q36 Relevance score: -2.31

Indian Government Bond Yields are influenced by which of the following? 1. Actions of the United States Federal Reserve 2. Actions of the Reserve Bank of India 3. Inflation and short-term interest rates Select the correct answer using the code given below.

CDS-II · 2016 · Q90 Relevance score: -2.54

Which of the following will be the outcome if an economy is under the inflationary pressure? 1. Domestic currency heads for depreciation. 2. Exports become less competitive with imports getting costlier. 3. Cost of borrowing decreases. 4. Bondholders get benefitted. Select the correct answer using the code given below.

IAS · 2018 · Q59 Relevance score: -2.81

If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India? 1. Not depending on short-term foreign borrowings 2. Opening up to more foreign banks 3. Maintaining full capital account convertibility Select the correct answer using the code given below:

IAS · 2013 · Q57 Relevance score: -3.41

A rise in general level of prices may be caused by 1. An increase in the money supply 2. A decrease in the aggregate level of output 3. An increase in the effective demand Select the correct answer using the codes given below.