Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking

The RBI sells government securities worth a large amount in the open market. What is the most likely immediate effect on the money supply and credit availability?

Money supply decreases because banks' reserves fall. When the RBI sells government securities in the open market, buyers pay out of bank funds, so banks have less to lend. Credit contracts, which is the standard anti-inflationary use of open market operations.

  1. AMoney supply increases and credit becomes cheaper
  2. BMoney supply decreases as banks' reserves fallCorrect
  3. CMoney supply is unchanged because only ownership of assets changes
  4. DMoney supply increases because bond prices fall

Explanation

When the RBI sells securities, buyers pay with bank deposits or cash, which reduces banks' reserves and their lending capacity. This contracts money supply and credit. It is a tool of quantitative credit control used to curb inflation. Saying money supply is unchanged ignores the drain on bank reserves.

Did you get it right without looking?

One question tells you little. A timed set on Money and Banking shows your real accuracy, how long you take and where you lose marks.

Practise Money and BankingFree diagnostic mock

More Money and Banking questions