Question

Arrange the following statements in the correct chronological order with respect to open market operations: \[ (A)\ \text{Payment for bonds increases total reserves in the economy} \] \[ (B)\ \text{RBI buys government bonds from the market} \] \[ (C)\ \text{RBI sells bonds when there is excess money supply} \] \[ (D)\ \text{Higher reserves increase money supply in the economy} \]

• A. (A), (B), (C), (D)
• B. (A), (C), (B), (D)
• C. (B), (A), (D), (C)
• D. (D), (A), (C), (B)

Hint:

In open market operations, buying bonds increases money supply, while selling bonds decreases money supply.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Open Market Operations (OMO) are the buying and selling of government securities by the RBI to regulate liquidity and money supply.
Step 2: Detailed Explanation:
Let's trace the expansionary process (increasing money supply):
1. First, the RBI buys government bonds (B) from commercial banks or the public.
2. To pay for these bonds, the RBI transfers funds. This payment for bonds increases total reserves (A) in the banking system.
3. With more reserves, commercial banks can create more credit. Consequently, these higher reserves increase money supply in the economy (D).
4. Once the money supply becomes excessive or leads to inflation, the RBI sells bonds (C) to "mop up" the excess liquidity.
Step 3: Final Answer:
The logical sequence of events is (B) $\rightarrow$ (A) $\rightarrow$ (D) $\rightarrow$ (C).