Answer to Question #228219 in Macroeconomics for Des Desmond Tourob

Question

Suppose the Central Bank of Brightland undertakes an open market purchase of securities of so that the monetary base increases by $5 billion. By how much will the quantity of money change? 

Answer 1

complete question : In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves

are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold

no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no

coins.

d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of

so that the monetary base increases by $5 billion. By how much will the quantity of money change?

solution

The quantity of money in the economy increases by the change in the monetary base multiplied by the money multiplier.

So the quantity of money increases by

$5\space billion \times10=\$50\space billion$