Question

suppose the reserveraho is 5 percent, banks do not hold excess reserves, people do not hold currency, and the Bank of Canada purchases $20 million of government bonds. Which statement best describes the effects of Bank of Canada's purchase? O. Bank reserves decrease by $20 million, and the money supply eventually decreases by S400 million O Bank reserves increase by $20 million, and the money supply eventually increases by 5400 million O Bank reserves decrease by $20 million, and the money supply eventually increases by S400 million d. Bank reserves increase by $20 million, and the money supply eventually decreases by $400 million

Answer 1

1) Required reserve ratio = 5%

Money multiplier = (1 / Required reserve ratio) = (1 / 0.05) = 20

Government purchase bonds worth $20 million in exchange of giving them money. It will decrease reserve by $20 million and increase money supply by 20 million * Money multiplier = $400 million

Option C is correct.

2) Price of copper increased from $6 to $6.6 which is 10% increase.

Nominal Price increase by 6%.

Nominal Price change = Inflation rate + Real Price change

6% = 10% + Real Price change

Real Price change = -4%

Option D is correct.