What can the central bank do to increase money supply in the economy?

Concept: A central bank steers the money supply with quantitative credit-control instruments. Two of them appear here — the bank rate, which is the rate at which the central bank lends long-term accommodation to commercial banks, and the cash reserve ratio (CRR), which is the share of a bank’s net demand and time liabilities that must be parked as cash reserves with the central bank.

Concept (the governing rule): every such instrument has an expansionary direction and a contractionary direction. An expansionary, cheap-money move either lowers the price at which banks obtain funds from the central bank or releases a larger share of deposits back to the banks, so banks lend more, the deposit-credit multiplier works on a larger base, and the money supply rises. A contractionary, dear-money move raises that price or immobilises a larger share of deposits, so credit creation and the money supply shrink.

Application: the question asks for the action that raises the money supply, so the expansionary direction of an instrument has to be chosen. Lowering the bank rate cuts what commercial banks pay for central-bank refinance; cheaper refinance lets them borrow more from the central bank and lend onward at lower rates, the multiplier expands deposits and credit, and the money supply grows. So decreasing the bank rate is the expansionary action among the choices offered.

Cross-check — the direction of each action offered:

Result: decreasing the bank rate increases the money supply; raising the cash reserve ratio, raising the bank rate and shrinking the pool of funds all tighten it. Remember the pairing: to expand money supply the central bank cuts rates (bank rate, repo rate) and cuts ratios (CRR, SLR); to contract it, the central bank raises them.