Question:
Which of the following will lead to an increase in the money supply?
(1) A decrease in income tax rates
(2) A decrease in government budget deficit
(3) Open-market purchase of securities by the Central Bank
(4) An increase in borrowing by the government issuing Treasury Bonds
(5) An increase in the policy interest rates
Correct Answer:
(3)
Answer Explanation:
When the Central Bank conducts an open-market purchase of securities, it buys bonds from commercial banks and the public. This injects new reserve money into the banking system, which banks then lend out, increasing the overall money supply through the credit creation process.
Topic: Monetary Policy Year: 2022
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