Question

Arrange the following steps in the correct sequence when RBI sells government bonds in the open market:
(A) The money supply in the economy decreases.
(B) Banks have fewer reserves available for lending.
(C) Private individuals or institutions buy the bond from RBI.
(D) The payment made to RBI reduces reserves in the banking system.
Choose the correct answer from the options given below:

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

Hint:

When the RBI sells bonds, the money supply in the economy decreases. Understanding the sequence of this process is crucial in controlling inflation.

Answer 1

The Correct Option is A

When the Reserve Bank of India (RBI) sells government bonds on the open market, a specific chain of actions occurs:
- (C): The bonds are acquired by private entities (individuals or institutions) from the RBI.
- (D): Funds transferred to the RBI for these bonds diminish banking system reserves. This occurs because the payment received by the RBI is withdrawn from the banking system’s liquidity.
- (B): With diminished reserves, banks possess a reduced capacity for lending.
- (A): The decrease in bank reserves consequently contracts the overall money supply within the economy. This mechanism is a key strategy for managing inflation.
Therefore, the logical progression of these events is (C), (D), (B), (A).