Explain how each of the following actions by the central bank affects the money supply. a. The central bank buys bonds in open-market operations. b. The central bank calls in a loan from Bank of America (a commercial bank), and Bank of America repays the loan by lending less to its customers.
Added by Sean T.
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This transaction increases the reserves of the banks that sell the bonds. As a result, the banks have more reserves available to lend out, which increases the overall money supply in the economy. The process can be summarized as follows: - Central bank purchases Show more…
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