Discussion
In order to control credit and investment, the Central Bank of a country should
Answer: A
Correct answer: Sell securities in the open market and hike the cash reserve ratio.
Both actions drain liquidity from the banking system, which is what contraction requires. Selling securities in the open market takes cash out of the banks in exchange for the paper; raising the cash reserve ratio obliges banks to hold a larger fraction of their deposits with the central bank, where it cannot be lent.
The other combinations either work in the opposite direction or pull against themselves. Buying securities injects liquidity, and lowering the CRR releases it - those are the expansionary measures, used to encourage credit rather than to restrain it.
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