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Which one of the following measures of the Central bank would not lead to reduction of money supply?A.Imposing regulations to increase minimum reserve ratio of the banksB.Purchasing of government bonds from banksC.Selling of government bonds to the publicD.Increasing of cash rate (Policy rate)

Question

Which one of the following measures of the Central bank would not lead to reduction of money supply?A.Imposing regulations to increase minimum reserve ratio of the banksB.Purchasing of government bonds from banksC.Selling of government bonds to the publicD.Increasing of cash rate (Policy rate)

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Solution

The correct answer is:

B. Purchasing of government bonds from banks

Explanation:

When the Central Bank purchases government bonds from banks, it essentially gives banks more money in exchange for these bonds. This increases the amount of money that banks have available to lend, which increases the money supply in the economy. This is a typical expansionary monetary policy action, not a contractionary one.

On the other hand, the other options (A, C, D) are all measures that would lead to a reduction in the money supply:

A. Imposing regulations to increase the minimum reserve ratio of the banks would mean that banks have to hold more money in reserve and can lend out less, reducing the money supply.

C. Selling of government bonds to the public would take money out of the economy and into the Central Bank, reducing the money supply.

D. Increasing the cash rate (or policy rate) makes borrowing more expensive, which can reduce the amount of borrowing and thus the money supply.

This problem has been solved

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