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    Open Market Sale: Monetary Policy

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    Consider a world in which there is no currency and depository institutions issue only checkable deposits and desire to hold no excess reserves. The required reserve ratio is 20 percent. The central bank sells $1 billion in government securities. What happens to the money supply?

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    Solution Preview

    Before the sale, all depository institutions are holding 20% of their assets as reserves and 80% as loans. 100% of their liabilities are checkable deposits. When the central ...

    Solution Summary

    This solution uses the concept of the Money Multiplier (MM) to explain how the money supply changes when the central bank makes an open-market sale of government securities.