Question

Which has a greater impact on monetary base an open market purchase of 10 million Turkish Lira or a discount loan of 10 million Turkish Lira?

Answer 1

Monetary base is the circulation of money in the economy in the form of cash with public or commercial bank reserves held with central bank.

If Fed purchase bonds from open market operations, they will pay 10 million to people in exchange of bonds which will raise cash with people by the same amount.

If they offer discount loan, they will deduct interest amount from principal when lending which means there will be rise in circulation of money which is less than 10 million.

Thus, open market purchase will raise more monetary base.