Suppose a central bank makes an open market purchase of $100 in government bonds. Assume commercial banks operate with a desired reserve ratio rr = 0.10 or 10% and the non-bank public does not change its cash holdings when its deposit holdings change. Use simple balance sheets for the central bank and all commercial banks consolidated to illustrate and explain the effect of this central bank operation on the monetary base and the money supply.

Question

Quizplus · Accepted Answer

The Answer of Suppose a central bank makes an open market purchase of $100 in government bonds. Assume commercial banks operate with a desired reserve ratio rr = 0.10 or 10% and the non-bank public does not change its cash holdings when its deposit holdings change. Use simple balance sheets for the central bank and all commercial banks consolidated to illustrate and explain the effect of this central bank operation on the monetary base and the money supply.

Suppose a Central Bank Makes an Open Market Purchase of $100