Note that open market operations is the primary tool the Central Bank uses to control the supply of money. However, the total expansion in the money supply can be less than is predicted by the deposit expansion multiplier if a) banks choose to hold some excess reserves rather than lending all excess reserves, and b) some individuals prefer to hold cash instead of depositing their money in banks.

Suppose the Central Bank buys $100,000 of Canadian Treasury bonds from a wealthy Canadian businessman. The reserve requirement is 10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction. What will be the total impact on the money supply from this purchase by the Central Bank? Explain.

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