The correct answer is Option (1) → (A) and (C) only
To reduce the money supply in the economy, a central bank typically employs contractionary monetary policy tools. Let's analyze each option:
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(A) Increase bank rate: The bank rate (also known as the discount rate) is the interest rate at which commercial banks can borrow money from the central bank. If the central bank increases this rate, it becomes more expensive for commercial banks to borrow. This discourages banks from borrowing and, consequently, reduces their ability and willingness to lend money to businesses and individuals, thereby reducing the overall money supply in the economy. This is a correct action.
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(B) Reduce cash reserve ratio: The Cash Reserve Ratio (CRR) is the percentage of a bank's total deposits that it must hold as reserves with the central bank. If the central bank reduces the CRR, banks have more money available to lend, which increases the money supply. To reduce the money supply, the central bank would increase the CRR. This is an incorrect action for reducing money supply.
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(C) Increase in Repo Rate: The Repo Rate is the rate at which commercial banks borrow money from the central bank by selling securities to the central bank with an agreement to repurchase them at a later date. An increase in the Repo Rate makes it more expensive for banks to borrow short-term funds. This discourages banks from borrowing and lending, leading to a contraction in the money supply. This is a correct action.
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(D) Buy securities in the open market: When the central bank buys securities in the open market, it pays for these securities by crediting the accounts of commercial banks. This injects money into the banking system, increasing the reserves of commercial banks and, by extension, their lending capacity, which increases the money supply. To reduce the money supply, the central bank would sell securities in the open market. This is an incorrect action for reducing money supply.
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