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When the RBI buys government bonds in the open market, the money supply
Adecreases as reserves fall
Bstays fixed by statute
Cchanges only after a year
Dincreases as reserves rise
Answer & Solution
Correct answer: D. increases as reserves rise
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: NCERT Class 12 Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY_
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