Question

1. State whether the following actions increase, decrease or do not change the money supply. (5 pts each, Total : 25 pts):

• Central bank made an open market purchase of 1 Million TL.
• Central bank increased the required reserve ratio
• Central bank provided 1 Million TL worth of loans to the banking system.
• Banks decreased their excess reserves because the economy is in the expansion phase
• Agents increased their curreny holding due to a financial panic

Answer 1

a) Purchase of TL will increase the money supply because when bank purchases the TL it receives the TL and gives money to sellers. So money supply will increase in the economy.

b) Increase in required reserve ratio will decrease the money supply. Because now banks have to keep more funds with them as reserves and their lending capacity gets decreased. So now they will be able lend less which will decrease the money supply.

c) It will increase the money supply because now banks can lend more loans and this will increase the money supply.

d) When banks decreases the excess reserves they will lend more loans which will increase the money supply. In expansion phase usually money supply increases.

e) Increase in currency holdings will not change the money supply because currency remains in the economy even if it is not circulating.

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