Which of the following scenario will reduce money supply in the economy?

To reduce the money supply, the central bank or government needs to take actions that withdraw money from circulation or decrease the ability of banks to lend.

• A. Increase in lending by commercial banks: Increases money supply.
• B. Increase in foreign investment: Can increase money supply if foreign currency is converted to local currency.
• C. Purchase of government bonds by the government: This injects money into the economy, increasing money supply.
• D. Decrease government expenditure: When the government spends less, it reduces the amount of money flowing into the economy, thereby reducing the money supply.

The correct option is D.

• D. Decrease government expenditure.

Liquidity refers to how easily an asset can be converted into cash without significant loss of value.

The correct option is B.

• B. Measure of how quickly an asset can be made into cash.

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time, detailing its assets, liabilities, and owner's equity. It adheres to the accounting equation: Assets = Liabilities + Equity.

Two functions of commercial banks are:

• Accepting deposits from individuals and businesses.
• Granting loans and advances to individuals and businesses.

A surplus in the balance of payments (when a country receives more foreign currency than it pays out) increases the money supply. This happens because foreign currency inflows are converted into domestic currency, increasing the reserves of commercial banks and expanding the monetary base. This expansion, through the money multiplier effect, leads to a larger increase in the overall money supply in the economy.