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Suppose the central bank of Narnia purchases $10 million of government securities from the Narnian people....

Suppose the central bank of Narnia purchases $10 million of government securities from the Narnian people. Further suppose that the bank pays for these securities by issuing cheques, which the sellers deposit in their chequing accounts in the commercial banking system.

  1. Use Balance Sheets to show the effects of this transaction. (5)
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Answer #1

Answer - When the central bank will buy back securities from general public , the assets of central bank will show an addition of $ 10 million securities . It will also show deduction of 10 million which the central bank gives as cheques to public. This can be seen as -

For the commercial banks , it will be addition of $ 10 million to their checking deposits on liability side. This can be seen as -

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