4. Explain whether each of the following events increases or decreases the money

Question

4. Explain whether each of the following events increases or decreases the money supply. (6 marks) a. The Central Bank buys bonds in open-market operations. b. The Central Bank reduces the reserve requirement. c. The Central Bank increases the policy rate. d. A private bank repays a loan it had previously taken from the Central Bank. e. After a rash of pickpocketing, people decide to hold less currency. f. Fearful of bank runs, private banks decide to hold a higher proportion of deposits as reserves

Explanation / Answer

a. Increase in money supply

Explanation:

When central bank buys bonds from the public, money flows from the hands of central ban to the hands of public which leads to increase in money supply.

b. Increase in money supply

Explanation:

It increases the money supply because banks can increase loans and hold less cash.

c. Decrease in money supply

Explanation:

Increase in policy rate makes borrowing from central ban costlier. This leads to decrease in money supply.

d. Decrease in money supply

Explanation:

Since the bank repaid the loan, money flows from the hands of bank to central bank. So, the bank can not create money from this amount. So, it decreases money supply.

e. Increase in money supply

Explanation:

This increases more treasury bills in the bank.

f. Decrease in money supply

Explanation:

Holding more reserves means less loan. Less loan means decrease in money supply.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.