QUESTION

Suppose a central bank conducts an open market purchase of $4 billion worth of government bonds from members of the public (who do all their banking by way of chequing accounts at commercial banks). Assume the following: The target reserve ratio for all commercial banks is 2%. All commercial banks operate with no excess reserves. There is no cash drain. a) What change this will have on the overall level of commercial bank reserves? Explain. b) What change this will have on the overall level of deposits at the commercial bank? Explain. c) Will this have any impact on the short run equilibrium interest rate? Explain