If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in the money supply is:
If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in the money supply is:
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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reserve ratio= desired reserves/ deposits
money multiplier= change in excess x money multiplier
excess resrves: cash resseves- desired reserves
so money multiplier = 1/10%= 10
wouldn't the answer be 10x 10 million?. I'm so confused on where the 9 million came from. I think it's 10 million - 10%. Please help me explain this question.
Transcribed Image Text:If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in
the money supply is:
O an increase of $90 million.
Reason: This answer is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10).
O an increase of $100 million.
Reason: The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10).
a decrease of $90 million.
Reason: In this case, the money supply increases, not decreases. The answer of $90 million is found by multiplying excess reserves ($9
million) by the money multiplier of 10 (=1/0.10).
a decrease of $200 million.
Reason: In this case, the money supply increases, not decreases. The answer of $90 million is found by multiplying excess reserves ($9
million) by the money multiplier of 10 (=1/0.10).
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