In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank. The reserve–deposit ratio is 0.25.

a. What are the money supply, the monetary base, and the money multiplier?

b. Assume that Wikbank is a simple bank: it takes in deposits, makes loans, and has no capital. Show Wikbank’s balance sheet. What value of loans does the bank have outstanding?

c. Wiknam’s central bank wants to increase the money supply by 10 percent. Should it buy or sell government bonds in open-market operations? Assuming no change in the money multiplier, calculate, in dollars, how much central bank needs to transact.

Answer rating: 100% (QA)

The money supply is the amount of money in the economy It is given by the multiplier times of moneta... View the full answer