What is MONEY SUPPLY?

What impact do open market operations have on the money supply?

• Below is the T-account for Country One Bank, the only bank in a small island nation. In addition to the demand deposits of $100,000, citizens hold $20,000 in coins and currency. Assume that demand deposits and currency are the only forms of money. Citizens also hold $40,000 of government bonds. These are not considered to be part of the money supply. The reserve ratio is 10%. The central bank in this country undertakes open market operations and purchases $20,000 of bonds. Use this information to answer the following questions. Assets Liabilities Reserves $10,000 Deposits $100,000 Loans $90,000 10.1. What impact do open market operations have on the money supply? A. The money supply increases. B. The money supply decreases. C. The money supply remains unchanged.

• Answer:

  The only real statement in the question that is significant when talking about money supply is "the central bank... purchases 20000 of bonds." Since they are purchasing bonds from people they are giving money to people so your answer is A