The money supply in Macroland is currently 2,500,bank reserves are 400,currency held by the public is 500,and the banks' desired reserve-deposit ratio is 20%.Assuming that the values of 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 to/from the public.
A) purchase of 100
B) purchase of 250
C) purchase of 500
D) sale of 100
E) sale of 500

Question

Quizplus · Accepted Answer

The central bank can increase the money supply by purchasing government bonds from the public. This will increase bank reserves, which will allow banks to lend more money and increase the money supply. The correct answer is A: purchase of 100.

The Money Supply in Macroland Is Currently 2,500,bank Reserves Are