In the financial market context, suppose an economy in which the public holds cash worth $ 1,000 and demand deposits worth $ 2,000 and the reserve ratio is 10%

Economics Oct 28, 2020

In the financial market context, suppose an economy in which the public holds cash worth $ 1,000 and demand deposits worth $ 2,000 and the reserve ratio is 10%. Starting from equilibrium, if the central bank buys bonds worth $ 200 (round to 2 decimal places)

A) The money supply decreases by $ 200

B) The money supply increases by $ 200

C) The monetary base decreases by $ 500
D) The money supply increases by $ 500

Expert Solution

At the point when a national bank purchases bonds, money is spilling out of the national bank to commerical banks in the economy, expanding the money supply available for use. At the point when a national bank sells bonds, at that point money from singular banks in the economy is streaming into the national bank—decreasing the amount of money in the economy.

Correct answer is option B) The money supply increases by $ 200

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote