5. The simple money multiplier Aa Aa Suppose that the Bank of Canada buys $150,0

Question

5. The simple money multiplier Aa Aa Suppose that the Bank of Canada buys $150,000 of government bonds and the required reserve ratio is 0.30. If the assumptions of the simple money multiplier hold, this will the money supply by Which of the following assumptions is necessary for the simple money multiplier to be applicable? Banks hold no excess reserves. O Banks have perfect information about the creditworthiness of all borrowers. O The Fed has set the required reserve ratio to between 5% and 10%. If the correct assumption did not hold, the change in the money supply would be found. Which of the following describes why this holds true? than you previously 0 The multiplier only holds as long as the required reserve ratio is less than 15%. O If banks held excess reserves, they would make fewer loans. O Banks would make fewer loans than they would if they could perfectly observe borrowers' true riskiness.

Explanation / Answer

If canada banks buys bonds of $150000 this will lead to increase in money supply by 1/0.3*150000=500000

Money multiplier=1/R when banks dont hold any excess reserves

If assumption doesnot hold then change in money supply would be less because banks old excess reserves and they would make fewer loans.

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