Question:
The purchase or sale of government securities by the central bank to increase or decrease the money supply in the economy is called?
The purchase or sale of government securities by the central bank to increase or decrease the money supply in the economy is called?
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Remember:
Central Bank BUYS securities \(\implies\) Money supply EXPANDS.
Central Bank SELLS securities \(\implies\) Money supply CONTRACTS.
Central Bank BUYS securities \(\implies\) Money supply EXPANDS.
Central Bank SELLS securities \(\implies\) Money supply CONTRACTS.
Updated On: Sep 7, 2026
- Repurchase Agreement
- Net Worth
- Open Market Operations
- Assets
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The Correct Option is C
Solution and Explanation
Concept:
The central bank uses monetary policy instruments to manage the supply of money, credit availability, and prevailing interest rates.
These instruments are classified into direct tools and open-market market-based instruments.
Step 1: Defining Open Market Operations (OMO):
Open Market Operations (OMO) refer to the outright buying and selling of government securities (bonds and treasury bills) by the central bank in the open financial market.
- To expand money supply: The central bank buys securities from commercial banks and the public, injecting high-powered liquidity.
- To contract money supply: The central bank sells securities, absorbing excess cash balances from the commercial banking sector.
Step 2: Evaluating Distractor Options:
- A Repurchase Agreement (Repo) is a short-term collateralized borrowing arrangement rather than outright buying and selling of securities.
- Net worth represents the equity value of an institution (Assets \(-\) Liabilities).
- Assets are economic resources owned by an entity.
Final Answer:
This monetary operation is known as Open Market Operations. Hence, option (C) is correct.
The central bank uses monetary policy instruments to manage the supply of money, credit availability, and prevailing interest rates.
These instruments are classified into direct tools and open-market market-based instruments.
Step 1: Defining Open Market Operations (OMO):
Open Market Operations (OMO) refer to the outright buying and selling of government securities (bonds and treasury bills) by the central bank in the open financial market.
- To expand money supply: The central bank buys securities from commercial banks and the public, injecting high-powered liquidity.
- To contract money supply: The central bank sells securities, absorbing excess cash balances from the commercial banking sector.
Step 2: Evaluating Distractor Options:
- A Repurchase Agreement (Repo) is a short-term collateralized borrowing arrangement rather than outright buying and selling of securities.
- Net worth represents the equity value of an institution (Assets \(-\) Liabilities).
- Assets are economic resources owned by an entity.
Final Answer:
This monetary operation is known as Open Market Operations. Hence, option (C) is correct.
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