If the State Bank buys a government bond worth Rs 1,000 from you, and you deposit the entire amount into your bank, what is the maximum possible increase in the money supply given that your bank maintains a reserve ratio of 20%?

Multiple choice question for Money, Interest Rates And Output. Select an option, then review the explanation below.

Explanation

When the State Bank purchases a Rs 1,000 government bond, it injects Rs 1,000 into the banking system. With a reserve ratio of 20%, the money multiplier is 1 divided by 0.20, which equals 5. Therefore, the total potential increase in the money supply is Rs 1,000 multiplied by 5, resulting in Rs 5,000.

Practice related questions from the same subject.

1.How does a decrease in interest rates affect the monetary base, consumer credit availability, and the cost of consumer credit?
2.Which variable do central banks typically set directly, and which variable adjusts as a consequence?
3.What is it called when the central bank purchases financial assets in the open market to expand the monetary base?
4.M4 is considered a __________ monetary aggregate and encompasses deposits held at both __________ and __________?
5.Assuming all other factors remain constant, what happens to the quantity of real money holdings when interest rates increase?

If the State Bank buys a government bond worth Rs 1,000 from you, and you deposit the entire amount into your bank, what is the maximum possible increase in the money supply given that your bank maintains a reserve ratio of 20%?

Explanation

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