CA Foundation P4 · Chapter 8 · Question 10 of 15
When the central bank purchases government securities in the open market, it:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Injects liquidity and increases the reserves of banks
Explanation
In an open market purchase, the central bank pays for securities by crediting banks' reserves, which increases liquidity and the capacity to lend. Open market sales have the opposite effect.
More Money Market MCQs
- Q12The repo rate is the rate at which:
- Q13Under the amended RBI Act, 1934, the policy repo rate required to achieve the inflation target is determined by:
- Q14In the Baumol-Tobin inventory approach to transactions demand for money, an increase in the interest rate will:
- Q15Milton Friedman's restatement of the quantity theory treats the demand for money as:
- Q1The most fundamental function of money, which removes the need for a double coincidence of wants, is its function as a: