Question

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve/deposit ratio is 0.20. Assuming the values of the currency held by the public and the desired reserve/deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ____ government bonds to/from the public.

Answer 1

Answer:

Purchase of 300

Explanation:

Given,

Money Supply is 2,500

Bank's deposit ratio is 0.20

Bank reserve is 200

Currency held by public is 500

Increase in the money supply is 3,000

Bank Deposit (BD) = Bank reserve / Bank's deposit ratio

= 200 / 0.20

= 1,000

Money Supply = Bank Deposit + Currency held by public

= 1,000 + 500

= 1,500

Purchase of 300

Then New BD = 500 / 0.20

= 2,500

New Money supply = 2,500 + 500

= 3,000

So, in order to increase the money supply to 3,000, should conduct the open market purchase of 300 bonds.