When the RBI buys government bonds in the open market, the money supply

1. The RBI pays for the bond by issuing a cheque. 2. That payment adds to the total reserves held in the economy. 3. More reserves support more credit, so the money supply **increases**. 4. Selling a bond does the reverse, withdrawing reserves and shrinking money supply, which is the trap in the second option. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY_