Which of the following measures would result in an increase in the money supply in the economy? 1) Purchase of government securities from the public by the Central Bank 2) Deposit of currency in commercial banks by the public 3) Borrowing by the government from the Central Bank 4) Sale of government securities to the public by the Central Bank Select the correct answer using the codes given below :

The correct answer is C (1 and 3). The core concept is how the central bank's actions change high-powered money (reserve money), which is the base for credit creation.

• Statement 1 is correct. When the RBI buys government securities from the public through open market operations, it pays by crediting the sellers' bank accounts or currency. Base money rises and the money supply expands.
• Statement 2 is wrong. When the public deposits currency in a bank, currency with the public falls by the same amount that deposits rise. Base money stays unchanged, so there is no fresh injection. The bank may lend more, but that is a separate step, not this measure itself.
• Statement 3 is correct. When the government borrows from the RBI, the RBI credits the government's account and effectively creates money. This is deficit monetisation, which is why the FRBM framework restricted it.
• Statement 4 is wrong. Selling securities to the public drains liquidity from the banking system, so the money supply contracts.

For Mains, this links to monetary policy transmission, the RBI's open market operations, and the debate on fiscal-monetary coordination. Since the FRBM Act 2003 and the later Supreme Court-era arrangements, direct RBI financing of the government has been curtailed. Ways and Means Advances now operate under strict limits, so the statement is a valid 2012 concept but a less practical one today.

Trap: Many aspirants pick option 2 because deposits sound like they add to money. Check whether the base money actually changes. Here it does not.