Question

Suppose Bank of Queenslanders hold 10% of deposits as reserves. How much money is created if...

Suppose Bank of Queenslanders hold 10% of deposits as reserves. How much money is created if RBA buys back a $20,000 bond from Kevin, a VIP depositor in Bank of Queenslanders?

$2,000

$200,000

$18,000

$0

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Answer #1

The amount of money created by each $1 worth bond bought by the central bank is given by the money multiplier. The money multiplier is the simple reciprocal of the reserve requirement. Reserve requirement is the percentage of deposit money the bank keeps as a required reserve.

Therefore, in this case, the money multiplier is

Therefore, an increase in the money supply is

Therefore, the correct option is: $200,000

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