ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Answer and Explanation: Open market sales will result in reducing reserves of the banking systems, which will further reduce the money base in an economy. And as money base and reserves will decrease, supply of the money in an economy will decrease automatically, therefore the correct answer is option C.

Detailed explanation-2: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.

Detailed explanation-3: -Open market operations change the monetary base, but the impact on the money supply is larger due to the money multiplier. When a central bank performs an open market operation, such as buying bonds, they pay for those bonds by depositing money into a bank’s reserves.

Detailed explanation-4: -Money Creation The money created by the Federal Reserve is the monetary base, also known as high-powered money. Banks create money by making loans. A bank loans or invests its excess reserves to earn more interest. A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar.

Detailed explanation-5: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.