Question

We studied how the Reserve Bank of Australia (RBA) can influence the money supply in the Australian financial market. Answer each question briefly.

How does the open market operations increase the number of dollars in circulation?

How does the reserve ratio influence the money supply?

What do you think happens to the money multiplier (M) in a financial crisis and what is the likely impact of change in M to the economy?

please answer succinctly

Answer 1

(1) An open market purchase of government securities by the central bank increases the amount of cash held byy public, which increases money supply and number of dollars in circulation.

(2) An increase (decrease) in reserve ratio requires the banks to hold more (less) proportion of deposits as required reserves, which lowers (raises) the excess reserves available for credit lending purposes. A fall (rise) in credit lending will decrease (increase) money supply.

(3) During financial crisis, people keep higher proportion as currency, lending to an increase in currency drainage. Higher currency drainage ratio decreases money multiplier, and therefore money supply decreases.