Question

Arrange the following statements in the correct chronological order with respect to open market operations: \[ (A)\ \text{Payment for bonds increases total reserves in the economy} \] \[ (B)\ \text{RBI buys government bonds from the market} \] \[ (C)\ \text{RBI sells bonds when there is excess money supply} \] \[ (D)\ \text{Higher reserves increase money supply in the economy} \]

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

Hint:

In open market operations, buying bonds increases money supply, while selling bonds decreases money supply.

Answer 1

The Correct Option is C

Concept:
Open market operations refer to the buying and selling of government securities by the central bank. In India, open market operations are conducted by the Reserve Bank of India. The RBI uses open market operations to control money supply in the economy. When the RBI wants to increase money supply, it buys government bonds. When the RBI wants to reduce money supply, it sells government bonds.

Step 1: RBI buys government bonds from the market.
The process starts when the Reserve Bank of India buys government bonds from the market. When RBI buys bonds, it gives money to the sellers of the bonds. Therefore, the first step is: \[ (B) \]

Step 2: Payment for bonds increases reserves.
When RBI pays for the bonds, money enters the banking system. This increases the reserves of commercial banks. So, the second step is: \[ (A) \]

Step 3: Higher reserves increase money supply.
When banks have higher reserves, they can create more credit. They can give more loans to people and businesses. This increases deposits and money supply in the economy. So, the third step is: \[ (D) \]

Step 4: RBI sells bonds when there is excess money supply.
If money supply becomes excessive, RBI sells government bonds. When banks or people buy these bonds, money moves from the economy to the RBI. This reduces money supply. So, the final step is: \[ (C) \]

Step 5: Final arrangement.
Thus, the correct chronological order is: \[ (B),\ (A),\ (D),\ (C) \] Hence, the correct answer is: \[ \boxed{\text{(C) (B), (A), (D), (C)}} \]