Assume the Central Bank buys $400 K in US Treasury Bonds from corporations and the households. Also assume

Assume the Central Bank buys $400 K in US Treasury Bonds from corporations and the households. Also assume that the required ratio is .15 and the currency drain/currency ratio (how much people like to hold in cash rather than in their banks) is .12, then how much did the money supply increase or decrease? (hint - keep no more than 3 decimal places in your money multiplier and select the answer that comes closest)

Solutions

Expert Solution

Given,

Amount of treasury bonds purchased = $400K or $400,000

Required ratio (i.e. reserve ratio) = 0.15

Currency drain (or currency ratio) = 0.12

The value of treasury bonds purchased by the central bank from the corporations and households will increase the money supply as the corporations and households will receive money in exchange for bonds.

The reserve ratio is the percentage of deposits of the bank that is required to keep in reserve rather than lend to borrowers.

The currency drain ratio is already explained in the question.

Money multiplier:

Increase in money supply:

The money supply will increase by 1,659,200.

Junaid answered 1 year ago

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