in the context of the financial market, suppose an economy in which the public holds cash for $ 1,000 and demand deposits for $ 2,000 and that the reserve ratio is 110%

Economics Oct 28, 2020

in the context of the financial market, suppose an economy in which the public holds cash for $ 1,000 and demand deposits for $ 2,000 and that the reserve ratio is 110%. Starting from equilibrium, if the central bank buys bonds worth $ 100 (round to 2 decimal places) The monetary base decreases by $ 100 OR The money supply increases by S 100 OR The money supply increases by $ 250 OR The money supply decreases by $ 250 A

Expert Solution

Answer....b , The money supply increases by $100

When the central bank buys bonds, it increases monetary base , it increases money supply as $100 will be extra injected in the financial market. This operation of the central bank is called open market operations (OMO).

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