Answer to Question #228717 in Macroeconomics for Afzal

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

When Central Bank purchases the bond , the money stock will increase. Deposited cash in this situation acts as reserves hence increasing money supply within the financial institution. The stock to maintain flow of transaction will be available, which increases the supply of money.