Answer to Question #220458 in Macroeconomics for Vandana

Question

What will be the money supply ,if the central bank purchases a government bond from an individual who deposits all the money that has been received from the sale in the bank

Answer 1

The money supply in the economy will increase. The money supply grows because the money the individual deposits in the bank grows or expands the money stock held by the banks, thereby increasing the lending capacity of banks. The citizens of the country can now access credit from banks whenever they need it. This phenomenon expands the supply of money in the economy.