Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By purchasing government securities to increase money supply
B
By selling government securities to decrease money supply
C
By lowering interest rates to encourage borrowing
D
By increasing government spending to stimulate the economy
Understanding the Answer
Let's break down why this is correct
Answer
A central bank uses open market operations to control the money supply in the economy, which can help slow down inflation. When it wants to implement a contractionary policy, it sells government securities, like bonds, to banks and financial institutions. This means that banks pay money to buy these securities, which reduces the amount of money they have available to lend. For example, if a central bank sells $1 million in bonds, banks lose that money, making it harder for them to give out loans. As a result, less money is flowing in the economy, which can help cool down rising prices.
Detailed Explanation
When a central bank sells government securities, it takes money out of the economy. Other options are incorrect because Some might think buying securities increases money supply; Lowering interest rates encourages borrowing.
Key Concepts
Central bank
Money supply
Contractionary policy
Topic
Open Market Operations
Difficulty
hard level question
Cognitive Level
understand
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