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If the RBI conducts an outright OMO purchase of government bonds, the immediate effect on money supply is
AMoney supply contracts
BMoney supply expands because reserves of commercial banks rise
CMoney supply expands only after the next quarter
DNo change
Answer & Solution
Correct answer: B. Money supply expands because reserves of commercial banks rise
When RBI buys bonds and pays via cheque to the seller, that cheque is deposited and adds to commercial bank reserves. More reserves → more lending capacity → money supply rises through the multiplier.
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