Question

What will the Reserve Bank do if it wants to increase high-powered money?

• A. Will purchase government securities
• B. Will sell government securities
• C. Will increase cash reserve ratio
• D. None of these

Hint:

To increase high-powered money, the central bank purchases government securities, which adds liquidity to the banking system.

Answer 1

The Correct Option is A

Step 1: Understanding high-powered money.
High-powered money refers to the money supply controlled by the central bank, including currency in circulation and reserves. The Reserve Bank controls this money supply through open market operations, such as buying and selling government securities.

Step 2: Analyzing the options.
(A) Will purchase government securities: Correct. When the Reserve Bank purchases government securities, it injects money into the banking system, increasing high-powered money.
(B) Will sell government securities: This would reduce high-powered money, not increase it, as it pulls money out of the banking system.
(C) Will increase cash reserve ratio: Increasing the cash reserve ratio would reduce the amount of money banks can lend, thus reducing high-powered money.
(D) None of these: This is incorrect, as the correct answer is (A) Will purchase government securities.

Step 3: Conclusion.
The correct answer is (A) Will purchase government securities, as buying government securities increases the high-powered money supply in the economy.