Suppose the central bank purchases a government bond from a person who deposits the entire amount received from the sale in her bank the money supply will ?
Correct answer: A. rise by an amount that depends on the bank's reserve ratio
- A. rise by an amount that depends on the bank's reserve ratio
- B. rise by less than the amount of the deposit
- C. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio
- D. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio
- E. be unchanged
Explanation
The bond purchase creates bank reserves, and when the seller deposits the proceeds, banks can use excess reserves to create additional deposits through the money multiplier. Therefore, the money supply rises by an amount dependent on the reserve ratio.
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