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:
Explanation
Statement 1 is correct: When the central bank buys government securities (like bonds) from the public it injects money into the economy. The sellers of these securities receive cash, increasing the money supply. This is a key tool of monetary policy known as open market operations.
Statement 2 is incorrect: When the public deposits currency into commercial banks, it doesn’t increase the overall money supply. It simply changes the form of money. Currency in circulation decreases but bank deposits increase by the same amount. These deposits can then be used by banks to create credit. Thus the initial act of depositing cash is neutral with respect to the money supply.
Statement 3 is correct: When the government borrows directly from the central bank, it often leads to an increase in the money supply. The central bank essentially creates new money to lend to the government. This is sometimes referred to as "monetizing the debt."
Statement 4 is incorrect: When the Central Bank sells government securities to the public, it effectively reduces the amount of money circulating in the economy. The public (individuals or financial institutions) buys these securities by paying money to the Central Bank. This payment transfers money from the public’s hands to the Central Bank, which essentially "locks away" this cash. This tool is part of Open Market Operations (OMO) aimed at controlling inflation or overheating of the economy.