The correct option is Money supply decreases..
Explanation
Open Market Operations (OMO) involve the buying and selling of government securities by the Central Bank in the open market. This is a quantitative monetary policy tool used to regulate the liquidity and money supply within the economy.
Mechanism of Selling Securities
- Action: When the Central Bank sells securities, commercial banks and financial institutions purchase them.
- Fund Transfer: To pay for these securities, banks transfer funds from their liquid reserves to the Central Bank.
- Impact on Reserves: This transaction reduces the excess reserves held by commercial banks.
- Impact on Money Supply: With reduced reserves, the banks' capacity to create credit (lend money) diminishes. Consequently, the total volume of money circulating in the economy decreases.
Key Takeaway
Selling securities by the Central Bank absorbs liquidity from the market (contractionary policy), leading to a decrease in money supply. Conversely, buying securities injects liquidity (expansionary policy), increasing the money supply.