Which of the following action(s) by the Government would lead to contraction of money supply in the economy? 1. Purchase of Treasury Bills by the central bank from public 2. Sale of Treasury Bills by the central bank to public 3. Sale of foreign exchange by the central bank 4. Purchase of foreign exchange by the central bank Select the correct answer using the code given below : (a) 1 and 4 only (b) 1 and 3 only (c) 2 and 3 only (d) 2 only

Contraction of the money supply occurs when the central bank withdraws liquidity from the economy. Selling Treasury Bills (T-Bills) to the public is a classic open market operation where the central bank receives cash/reserves from the public in exchange for securities, thereby reducing the domestic monetary base [3]. Similarly, when the central bank sells foreign exchange, it receives domestic currency from the buyer, which effectively removes that money from circulation, leading to a contraction [1]. Conversely, purchasing T-Bills or foreign exchange injects liquidity into the system, increasing the money supply [2]. Therefore, actions 2 (Sale of T-Bills) and 3 (Sale of foreign exchange) are contractionary measures. This process is often part of 'sterilization' to offset capital inflows and manage inflation or currency appreciation [1].

Sources

1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
3. [3] https://www.investopedia.com/terms/o/openmarketoperations.asp