Question

a fractional reserve banking system with no excess reserves and no curteney holdings, suppose the central bank buys $100 million of bonds. Which statement best describes the effects of is open-market operation? Reserves increase by $100 million, and the money supply increases by more than 100 million O. Both reserves and the money supply increase by more than 100 million. O Reserves and the money supply increase by less than $100 million O d. Reserves increase by $100 million, and the money supply increases by $100 million.

Answer 1

1. Option a is the correct answer.

Explanation : When Central bank buys $100 million of bonds in open-market operations, bank reserves will rise by $100 million. This will increase money supply by the amount equal to increase in reserves*money multiplier (where, money multiplier = 1/reserve ratio). As reserve ratio is positive, money supply will rise by more than $100 million. Here, only option a is correct while others are inappropriate.

2. Option c is the correct answer.

Explanation :

Inflation rate = (Price index in 2019 - Price index in 1964)/Price index in 1964 * 100

or, Inflation rate = (200-35)/35 * 100

or, Inflation rate = 471.43%

Then, the price in 1964 of Ford Mustang will become = Price in 1964 + {(inflation rate/100)*price in 1964}

or, price in 2019 = $2,368+(471.43/100*$2,368)

or, price in 2019 = $2,368+$11,163.46

or, price in 2019 = $13,531 (approx)