Question

Which one of the following statements is most​ correct? A. Any central bank purchase of assets automatically results in an increase in the domestic money​ supply, while any central bank sale of assets does not necessarily affect the money supply. B. Any central bank purchase of assets results in an increase in the domestic money​ supply, while any central bank sale of assets causes the money supply to decline. C. Any central bank purchase of assets automatically results in a decrease in the domestic money​ supply, while any central bank sale of assets automatically causes the money supply to decline. D. Any central bank purchase of assets automatically results in an increase in the domestic money​ supply, while any central bank sale of assets automatically causes the money supply to decline. E. Any central bank purchase of assets automatically results in a decrease in the domestic money​ supply, while any central bank sale of assets automatically causes the money supply to increase.

Answer 1

Answer: Option (B) is correct.

Explanation:

Correct option: Any central bank purchase of assets results in an increase in the domestic money​ supply, while any central bank sale of assets causes the money supply to decline.

This is basically one of the monetary policy instrument which helps the central bank in order to control the money supply in the economy.

If central bank wants to contract the money supply then central bank sell some of the assets in the market to reduce currency in circulation. After the implementation of this policy, domestic consumers left with less cash in hand and hence they demand less.

On the other hand, if central bank wants to increase the money supply then central bank purchase some of the assets from the market to increase the currency in circulation. After the implementation of this policy, domestic consumers are with more cash in hand and hence they demand more.

∴ This is the statement that is most correct.