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 RBI sells government bonds in the open market, the following sequence of events takes place:
- (C): Private individuals or institutions purchase bonds from the RBI.
- (D): The payment made to RBI reduces reserves in the banking system. This is because when the RBI receives the payment for the bonds, the amount is removed from the banking system’s reserves.
- (B): As a result of the reduced reserves, banks have fewer reserves available for lending.
- (A): The reduction in reserves leads to a decrease in the money supply in the economy. This is an important tool for controlling inflation.
Thus, the correct sequence is (C), (D), (B), (A).