Respuesta :
As Canary Bank has no excess reserves so all reserves are required reserves than required reserve ratio is obtained by dividing reserves by demand deposits i.e. $10,000/$200,000 = 0.05. Therefore, the required reserve ratio is 0.05.
When Fed buys $50,000 in government bonds from Canary Bank then Fed will use reserves to pay Canary Bank for these government bonds which will increase the reserves held by Canary Bank by $50,000. The monetary base will also increase by $50,000 because the monetary base includes reserves. Therefore, the change in the monetary base is $50,000.
Change in money supply is estimated by multiplying the money multiplier by a change in reserves.
Change in reserves= + $50,000 ( where + sign indicate an increase in reserves)
The money multiplier is estimated as 1/required reserve ratio = 1/0.05 = 20.
So, change in money supply= 20*(+$50,000)= +$ 1,000,000
Therefore, the money supply will increase by $1,000,000 when Fed buys $50,000 in government bonds from Canary Bank.
A bond is a debt protection, similar to an IOU. debtors problem bonds to elevate cash from investors willing to lend them cash for a certain quantity of time. while you purchase a bond, you're lending to the company, which can be a government, municipality, or organization.
Bonds – additionally called constant-earnings instruments – are utilized by governments or organizations to elevate money by way of borrowing from traders. Bonds are commonly issued to elevate funds for precise tasks. In going back, the bond provider guarantees to pay lower back the funding, with interest, over a positive period of time.
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