GCECommerceBanking and Finance2021

When the Central Bank of Nigeria sells government securities to commercial banks, the likely effect on the economy is that

Athe money supply in the economy will increase
Bcommercial banks will have more funds to lend
Cthe money supply in the economy will decreaseCORRECT
Dinterest rates in the economy will fall
AI
Toaster Teacher
Why the answer is C, and why the others tempt you.
When the CBN sells government securities (open market operations), commercial banks pay for these securities, which reduces their reserves and therefore their capacity to create credit. This withdrawal of funds from the banking system reduces the overall money supply in the economy. This is a contractionary monetary policy tool used to curb inflation.
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