the reserve requirement in florin is 20%. the central bank of florin buys $2,000 worth of bonds using open…

the reserve requirement in florin is 20%. the central bank of florin buys $2,000 worth of bonds using open market operations. which of the following describes the impact of the open market purchase of bonds on the monetary base and the money supply? choose 1 answer: a the monetary base increases by less than $2,000; the money supply increases by at least $10,000 b the monetary base increases by at least $2,000; the money supply increases by at least $10,000 c the monetary base increases by exactly $2,000; the money supply increases by exactly $10,000 d the monetary base increases by less than $2,000; the money supply increases by up to $10,000 e the monetary base increases by exactly $2,000; the money supply increases by up to $10,000

the reserve requirement in florin is 20%. the central bank of florin buys $2,000 worth of bonds using open market operations. which of the following describes the impact of the open market purchase of bonds on the monetary base and the money supply? choose 1 answer: a the monetary base increases by less than $2,000; the money supply increases by at least $10,000 b the monetary base increases by at least $2,000; the money supply increases by at least $10,000 c the monetary base increases by exactly $2,000; the money supply increases by exactly $10,000 d the monetary base increases by less than $2,000; the money supply increases by up to $10,000 e the monetary base increases by exactly $2,000; the money supply increases by up to $10,000

Answer

Explanation:

Step1: Define monetary base change

When the central - bank buys bonds in open - market operations, it injects money directly into the economy. The amount of money it spends on bond purchases directly increases the monetary base. Here, the central bank of Florin buys $2,000 worth of bonds, so the monetary base increases by exactly $2,000.

Step2: Calculate money - multiplier and money - supply change

The reserve requirement $r = 20%=0.2$. The money - multiplier formula is $m=\frac{1}{r}$. So, $m=\frac{1}{0.2}=5$. The change in the money supply $\Delta M$ is given by $\Delta M = m\times\Delta MB$, where $\Delta MB$ is the change in the monetary base. Here, $\Delta MB = 2000$, so $\Delta M=5\times2000 = 10000$. However, this is the maximum change in the money supply assuming banks lend out all excess reserves. In reality, banks may hold excess reserves, so the money supply increases by up to $10,000$.

Answer:

E. The monetary base increases by exactly $2,000; the money supply increases by up to $10,000