The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve-deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve-deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ________ government bonds.

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Quizplus · Accepted Answer

When the Central Bank wants to increase the money supply, it must purchase government from the public. To compute the amount of the purchase it uses the equation: MS = currency held by the public + (bank reserves/desired reserve-deposit ratio). In this case, currency held by the public is unchanged, so the increase MS by 500 comes from (bank reserves/desired reserve-deposit ratio): (x/0.10)= 500, where x is the increase in bank reserves. In this case x = 50, so an open-market purchase of 50 is appropriate.

The Money Supply in Macroland Is Currently 2,500, Bank Reserves