Commercial banks in Country A hold no excess reserves. The required reserve ratio is 0.1. The central bank of Country A has become concerned about a steep decline in investment spending.

1)Calculate the simple money multiplier.
2) Identify an open market operation that Country as central bank is likely to implement to address the decline in investment spending.

2. Open market operations are a tool used by the central bank to control money supply. The central bank can either buy government bonds in order to increase money supply or sell government bonds in order to decrease money supply. To counter the declining investment spending, the bank has to increase money supply for the country and allow citizens to invest the excess money they will now have at their disposal. The citizens will either invest / save or consume the money. Increasing money supply is done by buying the government bonds.

ogorwyne ogorwyne · Answer 2 · 2022-02-17T14:00:47+01:00

1. The calculated simple money multiplier is 10

2. The open market operation would be to buy government treasuries.

The money multiplier

This is how an initial deposit is able to bring about more increases in the total money supply in an economy.

Formula of money multiplier

[tex]Money Multiplier=\frac{1}{r} \\\\r = 0.1\\\\MM = \frac{1}{0.1} \\\\= 10[/tex]

2. The open market operation that the Central bank could use is the buying of government treasuries which would help to increase the supply of investment spending.

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