Question

how?

30. The central bank buys a bond from Ahmed for 2000 AED. Ahmed puts 700 AED under his mattress and deposits 1300 AED in his bank account. The reserve-to-deposit ratio throughout the banking system is 0.20. Except for Ahmed, everyone in the economy holds all money in bank accounts (no cash). What is the total increase in the money supply that will eventually result from the bond purchase? a. 6,5000 AED b. 7,200 AED c. 10,000 AED d. 8,400 AED e. None of the above.

Answer 1

Reserve to deposit ratio = 0.20 Money multiplier = 1/ Reserve to deposit ratio = 1/0.20 Money multiplier = 5 Central bank buys a bond form armed for 2000 A E D Ahmed puts 700 A E D under his matters and deposit 1300 A E D is his bank account. Change in money supply = (money multiplier) (change in deposits) change in money supply = (5) (1300 A E D) change in money supply = 6500 A E D Total increase in money supply would to the sum of change in money supply is increase in deposit through money multiplier and increase in cash in hand of public. Total increase in money supply = 6500 A E D + 700 A E D Total increase in money supply = 7200 A E D Answer: option (b)