Question

The central bank buys $15,000 worth of bonds in the open market from Christopher, who

Answer 1

Answer:

(a) What is the amount by which Carla Bank's liabilities have changed?

Carla Bank's liabilities increased by $15,000 (bank deposits are liabilities).  

(b) Calculate the change in required reserves for Carla Bank.

Carla Bank's reserves must increase by $15,000 x 5% = $750

(c) What is the dollar value of the maximum amount of new loans Carla Bank can initially make because of Christopher's deposit?

Carla Bank can loan $15,000 x 95% = $14,250

(d) Based on the central bank's open-market purchase of bonds, calculate the maximum amount by which the money supply can change throughout the banking system.

Money multiplier = 1 / 5% = 20

The money supply has the potential to increase by $15,000 x 20 = $300,000

(e) How will the change in the money supply in part (d) affect aggregate demand in the short run? Explain.

Aggregate demand will increase since the total money supply increases. This should also help to decrease the interest rates and foster investment.