Prelims 2012 · archive
MediumWhich 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:
Answer & explanation
Answer: (c) 1 and 3
Money supply rises when the central bank creates new reserve money. It does this by buying government securities from the public and by lending to the government. Moving existing currency into bank deposits, or the central bank selling securities, does not add money.
- ✓ 1. When the RBI buys government securities, it pays with newly created reserve money. This injects durable liquidity into the banking system and raises the money supply.
- ✗ 2. Money supply counts currency plus deposits. Depositing currency only shifts money from one form to the other, from currency with the public to a bank deposit, so the total does not rise from this act itself.
- ✓ 3. RBI credit to the government is a source of reserve money. When the RBI lends to the government, new money is created and infused into the system.
- ✗ 4. When the RBI sells securities, it absorbs money from the banking system. This reduces liquidity, so the money supply contracts rather than expands.
Remember · RBI buying securities or lending to the government creates money. RBI selling securities absorbs money. Shifting cash into bank deposits does not by itself change the money supply.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- RBI – Monetary Policy: instruments (liquidity management, OMOs) ↗ “These include outright purchase/sale of government securities by the Reserve Bank for injection/absorption of durable liquidity in the banking system.”
- RBI speech on the central bank's balance sheet and the money supply process ↗ “When net domestic assets increase due to increase in net RBI credit to Government or commercial sector, or on account of refinance availed by banks, new money or created money is infused into the system.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “If we assume that there is no currency in circulation, then the total money supply in the economy will be equal to Rs 100. M1= Currency + Deposits = 0 +100 =100”
Question: UPSC Civil Services (Preliminary) 2012, General Studies paper. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·