Monetary Policy

When RBI sells government bonds in the open market, the following sequence of events takes place:
- (C): Private individuals or institutions purchase bonds from the RBI.
- (D): The payment made to RBI reduces reserves in the banking system. This is because when the RBI receives the payment for the bonds, the amount is removed from the banking system’s reserves.
- (B): As a result of the reduced reserves, banks have fewer reserves available for lending.
- (A): The reduction in reserves leads to a decrease in the money supply in the economy. This is an important tool for controlling inflation.
Thus, the correct sequence is (C), (D), (B), (A).

Step 1: Define Fiat Money.
Fiat money is currency issued by the government or central bank which has no intrinsic value but is accepted as money because of legal backing. Notes and coins are fiat money.
Step 2: Distinguish from other terms.
- Broad Money: Includes currency + demand deposits + time deposits + other liquid assets.
- Currency Base: Refers to high-powered money (currency in circulation + reserves with banks).
- Narrow Money: Refers to M1 = currency in circulation + demand deposits. Not limited to just coins/notes.
Step 3: Apply to the question.
Since the question explicitly refers to notes and coins, these are Fiat Money.
Final Answer:

Step 1: Recall liquidity concept.
Liquidity = how quickly an asset can be converted into cash without loss of value.
- Highest liquidity → Currency and demand deposits (most liquid).
- Then savings deposits.
- Then time deposits.
- Least liquid → broader aggregates with post office deposits.
Step 2: Order the options.
- (C) Currency + Demand Deposit → Most liquid (M1).
- (A) Currency + Demand + Savings deposits (Post Office) → Next liquid.
- (D) Currency + Demand + Net time deposits (M2/M3).
- (B) Currency + Demand + Net time + Post Office deposits (broadest, least liquid).
Step 3: Correct sequence.
Thus, order is: (C), (A), (D), (B).
Final Answer:

Step 1: Understand each term.
- CRR (Cash Reserve Ratio): Portion of commercial bank deposits that must be kept as cash reserves with the RBI.
- SLR (Statutory Liquidity Ratio): Portion of deposits that must be kept in liquid assets like cash, gold, or approved securities.
- Lender of last resort: Role of the Central Bank (RBI in India) to provide emergency funds when banks face liquidity crisis.
- Repo Rate: Rate at which the Central Bank lends money to commercial banks against securities.
Step 2: Match with List-II.
- (A) CRR → (III) Cash reserves with the Central Bank.
- (B) SLR → (IV) Reserves in liquid form.
- (C) Lender of last resort → (I) Central Bank of the country.
- (D) Repo Rate → (II) Interest rate charged by Central Bank.
Step 3: Verify with options.
This matches option (2).
Final Answer: