Question

Suppose that the Federal Reserve Bank elects to purchase $1,400 worth of securities from the non-bank public, who then keeps the payment from the bank in the form of cash. In this case,

Group of answer choices

A) R increases by $1,400 and the MB rises by $1,400

B) C and R both increase by $1,400, and the MB does not change

C) C increases by $1,400 and the MB increases by $1,400

D) C increases by $1,400 and the MB does not change

Answer 1

It has been provided that Fed has purchased securities worth $1,400 from general public and the general public has decided to keep payments in form of cash.

So,

If non-bank public keeps the amount received in cash then currency in circulation will increase.

Currency in circulation is a component of monetary base.

So, increase in currency in circulation will result in an increase in monetary base.

Thus,

In this case, C increases by $1,400 and the MB increases by $1,400.

Hence, the correct answer is the option (C).