Which of the following policy actions by a central bank is likely to increase the money supply ?
Correct answer: C. Buying government bonds in open market operations
- A. Increasing the refinancing rate
- B. All of these will increase the money supply
- C. Buying government bonds in open market operations
- D. Increasing reserve requirements
Explanation
Buying government bonds injects reserves into the banking system, enabling banks to create more deposits and loans. Raising the refinancing rate or reserve requirement normally contracts money creation rather than expanding it.
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