Answer to Question #91087 in Macroeconomics for Bishwa

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

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, it will cause money stock to increase in the banks. The deposited cash will act as reserves thus increasing the amount of money the bank can lend.